By Remitbee - Sep 8, 2020
With the continuing stand-off between the Modi government at the Centre and the Opposition-ruled States in the wake of a huge shortfall in collection of GST (goods and services tax), the benchmark 10-year bond yield has moved up to over 6% on Tuesday. The yield has now risen to 6.06%.
The yield had been below 6% for a few days since the Reserve Bank of India announced Operation Twist which involved simultaneous buying and selling of government bonds for the like amount.
In the meanwhile, a row has erupted over the payment of GST dues to the States. GST is a single indirect tax across the nation. The GST came into existence after several rounds of hectic parleys between the Union Government and the State. A pact on GST was clinched after the Central government agreed to compensate the states for the revenue loss arising out of their agreement to transit to a single tax regime. Under the arrangement, states are guaranteed a prescribed revenue growth for an agreed period. The coronavirus and the lock-down in its wake have thrown the whole calculations haywire. The Central government has now wanted the States to borrow to make good the shortfall in the GST collection. This has not found favor with many Opposition-ruled states. And, the GST stand-off is threatening to hamper the relationship between the Central Government and the States.
Also, Check - Bond yields down in India
It is against this backdrop that the yield on the benchmark 10-year government bonds has breached 6%. Markets seem to be pricing in huge borrowings. The borrowings have now become inevitable. The question, however, is: who will do it? Should it be by the Centre? Or, Should it be by the States? An answer is now engulfed in a bitter row between the Central government and the states.
A rising yield is the least that the monetary authorities will want at the moment, especially since the economy has found itself in a quicksand-kind of a situation following a prolonged lock-down in the wake of a spreading pandemic.
The Indian bourses, in the meanwhile, slipped marginally with the BSE Sensex index shedding 52 points, or 0.1%, to close at 38,365 on Tuesday, amid fresh tensions between New Delhi and Beijing. With the tech sector also remaining under pressure, the markets are still edgy. Border tensions escalated after India and China accused each other of firing in the air during a fresh confrontation on their border in the western Himalayas. The Chinese foreign ministry accused the Indian troops of illegally crossing a line of control on their shared border and were first to fire warning shots. The Indian side, however, asserted that the Chinese troops were attempting transgression.
To add to the market woes, global rating agencies have rushed to announced further downward revision of their estimate of India’s GDP for 2020-21.
All these are having an impact on the equity market.
The U.S. dollar, in the meanwhile, strengthened against the Indian currency. The American currency increased by 0.3340 or 0.45% to 73.7780 on Tuesday i.e. September 8 from 73.4440 in the previous trading session.