Why are government bonds rise after the budget of 2022?

The Union Budget pegged the budgeted gross market borrowing number for the next fiscal at Rs 14.95 trillion. This was significantly higher than consensus expectations in the range of Rs10-13 trillion. Higher government borrowing means the market will have to absorb a greater supply of bonds in the coming months. Bond yields have been rising across the world on the back of higher inflation and plans for policy normalization. The yield on 10-year benchmark bonds has increased almost 110 bps from pandemic-era lows.

A higher yield means the government will have to pay more as a return to investors, leading to a rise in the cost of borrowing. This will impact the financial system, and put upward pressure on general interest rates. This may force RBI to raise interest rates pre-emptively, as it juggles between its role as a monetary authority and the government’s banker.

Further, markets were expecting some policy statements on the inclusion of India’s sovereign bonds in global bond indices. A green flag to the move could have led to an inflow of roughly around $20-40 billion per year, which would have provided some cushion to the bond market. Rising crude prices, inflation risks, and signals of interest rate hikes by the US Federal Reserve have also contributed to the hardening of bond yields. A section of the market attributes the rise in yields to the RBI’s plan to exit its accommodative stance in the coming months.