India's Bond Yields Surge as GST Cuts Raise Fiscal Concerns

As of September 10, 2025, India's bond market is indicating that further interest rate cuts by the Reserve Bank of India (RBI) are less likely in the near future. The yield gap between the 10-year government bond and the repo rate has reached its widest level in two years, reflecting the stage of the rate cycle.

The rise in bond yields is primarily attributed to concerns about the fiscal implications of the government's recent decision to reduce the Goods and Services Tax (GST) slabs to 5% and 18%, and move several product categories to lower rates. The market fears that this move could lead to a spike in government borrowing to make up for the revenue shortfall.

Adding to the uncertainty, the RBI has retained its neutral monetary policy stance, leading the market to believe that subsequent rate cuts may be delayed in the coming months. Pressure on the rupee and tariff-related uncertainties have also made investors more cautious about potential inflation risks.

While the government has pegged the revenue shortfall from the GST cuts at around ₹48,000 crore per year, the actual fiscal impact may be smaller than expected. The finance minister has stated that the expected boost in consumption will help the government retain its budgeted fiscal deficit target of 4.4% for the current financial year.

Nevertheless, the bond market remains alert, as yields briefly spiked to a recent peak of 6.64% before easing to 6.47% on August 29, 2025. Analysts suggest that the RBI may need to take corrective steps, such as reducing the supply of ultra-long bonds, cancelling select auctions, or conducting open-market purchases, to ease the pressure and bring the 10-year yields lower.