Higher yields leave Centre and states concerned

Cost of borrowing to go up, analysts say robust tax revenues crucial

- ARUP ROYCHOUDHURY & INDIVJAL DHASMANA

On May 4, as the Reserve Bank of India (RBI) Governor Shaktikanta Das announced an out-of-cycle rate hike, the yield on the benchmark 10-year government of India bond (G-sec) rose 3.64 per cent, the highest single-day rise so far this calendar year, to reach their highest levels since May 2019.

In fact, since January 1, benchmark bond yields have risen more than 14 per cent, as Russia's invasion of Ukraine has led to a spike in global commodity prices and disrupted the flow of liquidity.

For the Centre and states, higher yields mean a higher cost of borrowing. Going by the information available so far, things could look especially worrisome for the Centre, as higher borrowing costs add to the higher subsidy burden, which it already faces.

"While we don't look at a single day but the entire span of a year, interest costs and subsidies do point to a situation which is not ideal," a senior government official told Business Standard. "For now, it is manageable, but the latitude to manage shrinks with every uncertainty," the person said.