What Is Bond Yield And Why Rising Bond Yield Is A Concern For Indian Economy?

Interest rates in the economy, bond rates, bond yield, inflation all these macro-economic factors do not work on a standalone basis and instead pose an impact on the other. The higher CPI and WPI inflation which have now moved closer to the RBI's benchmark target of 4% is one concern attributed to the hike in the bond yield to the 7% mark.

In a TV interview, Chief Economic Advisor of the country Arvind Subramaniam also attributed the hike to higher crude oil prices in the international market which saw reaching to levels as high as 65$ per barrel.

So, what is this bond yield and why rising bond yield is a concern?

Bond-yield for a 10-year maturity instrument which has moved a tad higher over 7% mark is reflective of the economy in the sense that it gives the true picture of the government and corporate borrowing. And in a scenario when inflation rises; there is left not much scope for the govt. to cut down on repo and other policy rates and hence bond prices reduce and correspondingly bond yield rises.

This time around the benchmark bond yield gained nine basis points to 7.06%, a level not seen since September 8, 2016. Corporates will be in a tough stand as they now have to shell out for borrowing through the bond route whose pricing is at par with sovereign debt.

With surging yields, many top-rated public-sector companies are not tapping the debtmarket in a hurry, said a top broking house.

Another key economist pointed out that fiscal wise the country is not likely to see any negative consequences as already all the negatives have been factored in. He also suggest that since the demonetisation there was lot of overbuying in the bond market which is now seeing a correction. Also, the government's aggressive plan is pulling the bond yield's higher.

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