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Why Bond Yields Increase?

The Reserve Bank of India (RBI) had said foreign portfolio investors could buy up to 1 percentage point more in government bonds, but in two stages, in 2018-19. The rise in the limit was less than what the market expected which had upset bond markets and yields shot up. While yields were firming up, the indicative calendar for state development loans came as a shock to the bond market. The calendar showed states would be borrowing Rs 1.15-1.28 trillion in the first quarter, way higher than the usual borrowing plan of Rs 700 billion. Oversupply of bonds had pulled down demand for bonds and prices fell. Needless to say, yields moved up.

Oil prices reached a fresh three-year high. Since the last few months, oil prices have been inching up. India, imports about 80 per cent of the oil it uses. Rise in oil prices push fiscal deficits and therefore government needs to raise funds from the market by way of issuing more bonds which will curtail demand for the existing bonds. In anticipation of this bond prices have declined and yield moved up.


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