Gilts Stabilise After Tax U-Turn Sell-Off
The Indian government bond market has regained stability following a sharp sell-off caused by the government’s surprise reversal on a key tax policy. Benchmark 10-year gilt yields, which had surged to multi-month highs, have steadied as investors reassess the economic outlook.
The Tax U-Turn and Immediate Market Impact
Last week, the Finance Ministry scrapped a proposed tax exemption on long-term capital gains (LTCG) for sovereign bonds—a policy initially designed to attract foreign investment. The abrupt reversal triggered a steep sell-off, with the 10-year government bond yield (7.18% GS 2033) jumping by 15 basis points, marking its sharpest single-day rise in months.
The sell-off highlighted investor concerns over policy unpredictability. Foreign portfolio investors (FPIs), previously net buyers of Indian debt, turned cautious, while domestic banks and mutual funds also adjusted positions, amplifying volatility.
Why Gilts Have Stabilised
The bond market has since recovered, supported by key factors:
- RBI Intervention – The Reserve Bank of India hinted at potential open market operations (OMOs) to manage liquidity, reassuring traders.
- Easing Inflation – April’s CPI inflation dipped to 4.8%, reinforcing expectations of steady interest rates.
- Global Support – A retreat in US Treasury yields and softer crude oil prices improved India’s inflation and fiscal outlook.
Market Sentiment Remains Cautious
While the worst of the sell-off has passed, uncertainty lingers. The sudden policy shift has raised questions about India’s regulatory consistency—critical for long-term investors.
“Policy flip-flops create uncertainty, which is damaging for sovereign debt markets,” said a senior fixed-income trader.
Foreign investors, eyeing India’s upcoming inclusion in global bond indices, are particularly wary of further surprises that could delay inflows.
What’s Next for Indian Gilts?
Attention now turns to:
– The RBI’s June policy meeting (rate hold expected, but liquidity guidance is key).
– The government’s H2 FY25 borrowing schedule.
If global conditions remain favorable and inflation stays subdued, yields may ease. However, fiscal risks or renewed inflation could spark volatility.
Bottom Line
The rebound shows the market’s resilience but underscores the need for policy stability. Investors should stay alert—India’s debt markets remain prone to surprises.
(Follow NextMinuteNews for real-time updates on bonds, equities, and economic policy.)
