Our market for bonds: It has a mind of its own

Rising bond yields reflect fears that new macro realities will enlarge the government's fiscal deficit and increase public borrowing. RBI should resist the urge to intervene beyond a point

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The rise in bond yields over the past few days demonstrates the power of market forces. Or, more precisely, of the bond market. By the end of August, the yield on the benchmark 10-year government bond (G-Sec) had risen to 6.6%, hovering near its highest level since 27 March, despite India's upbeat first-quarter GDP growth number (7.8%) and the Reserve Bank of India's (RBI) benign inflation outlook.

Over the past month alone, this yield has risen by about 26 basis points, even though RBI's rate-setting panel, the Monetary Policy Committee (MPC), has cut its key policy rate—the repo rate—by 100 basis points since February to 5.5%. The bond market seems to be marching to a different tune that shows little regard for robust growth data and RBI's shift to an easier monetary regime under Governor Sanjay Malhotra.