ANALYSIS Why an uptick in bond yields is a concern for the government?

Bonds

The rising bond yields have emerged as a pressure point as they have an effect on central and state finances, corporates, banks, and households. While Finance Minister Nirmala Sitharaman has ruled out immediate concerns arising from the increase in yields, she admitted that the surge is being closely observed given its affordability challenges.

“Yes, I won’t say I am concerned, but I am observing it and it is not affordable. Also at a time when interest rates are otherwise low, bond yields becoming unsustainably high has a big bearing on government and states,” Sitharaman said in an interview with Network18 Group Editor-in-Chief Rahul Joshi. She further added that the Centre’s “fiscal math is absolutely fine as of now.”

The 10-year benchmark bond yield — a yard-stick or threshold for borrowing rates in the money market — spiked by 18-20 basis points (bps) after the announcement of the recent GST reforms. The measures, while aimed at stabilising revenues and demand, raised speculation that the government might adjust its borrowing programme, which lead to an increase in bond yields.

However, bond yields eased after Sitharaman assured that the borrowing calendar will not be tweaked and that the fiscal deficit target remains on track. Her comments helped the bond market to ease pressure, with yields easing by 8-9 bps .

When government yields rise, the cost of borrowing for state governments, corporates, and banks also increase.

For corporates, elevated yields mean higher costs of raising debt from market. This could prompt delays in capital expenditure plans. For banks, higher yields on government securities raise the cost of funds, which in turn translates into higher lending rates for businesses and consumers.

“The government is concerned because government bonds are the benchmark for corporate borrowers. There has already been slack in credit growth despite lower bond yields, and if the benchmark yield spikes further, it may affect credit demand,” a money market expert noted.

For households, the transmission may be more direct; interest rates charged by lenders on home loans, vehicle loans, and personal loans could increase, affecting discretionary consumption.

Beyond private sector implications, the surge in yields poses direct challenges for the central and state governments as well. A large portion of existing government securities is due for redemption in the coming quarters. This implies that new issuances of government securities will replace old debt at higher costs.

According to Reserve Bank of India (RBI) data, securities worth Rs 2.61 lakh crore are set to mature between September and January. An additional Rs 5.52 lakh crore worth of government securities will come up for redemption in FY27. If yields remain elevated, the refinancing cost of this debt could materially elevate the government’s interest burden.

States, which are already grappling with tight fiscal positions, could face sharper pressures. Their borrowing costs are typically benchmarked to central government securities, and any rise in yields amplifies their debt-servicing challenges. This could constrain spending on developmental and welfare schemes, leading to a broader economic drag.