NEWS

• Recently, India’s 10-year government bond yield increased by 26 basis points (0.26%).
• This happened even though the RBI cut repo rate (the rate at which RBI lends to banks) by 100 basis points in 7 months.
• Normally, when rates are cut → bond yields fall. But here, the opposite happened.

HIGHLIGHTS

Key Concepts

• Bond Yield: The return (profit) an investor earns from holding a bond.
• Bond Price & Yield Relationship: If price falls → yield rises (inverse relation).
• Government Securities (G-Secs): Bonds issued by the government to borrow money.
• Open Market Operations (OMO): RBI buys/sells bonds to control yields.
• Operation Twist: RBI buys long-term bonds & sells short-term bonds to manage rates.

Why Are Yields Rising?

1. Inflation Worries
   • RBI still fears inflation despite cutting rates.
   • Investors think borrowing costs may remain high in the future.
2. Government Borrowing Concerns
   • Proposed GST reforms (simplifying slabs to 5% & 18%) may cause revenue loss.
   • Short-term revenue hit estimated at ₹50,000–60,000 crore.
   • To fill this gap, the government may borrow more.
   • More borrowing = more bonds in the market = lower prices → higher yields.

Market Impact

• Investors are selling long-term bonds → pushing yields up.
• Yield curve has steepened, showing expectations of higher borrowing costs.

Possible Solutions

• Shift borrowing to short/medium-term bonds.
• RBI may use OMOs or Operation Twist to buy long-term bonds → reduce supply → lower yields.