India's bond markets are seeing their worst sell-off in recent times, and all eyes are on the Union Budget 2018, to calm nerves.

However, if the fiscal deficit worsens or the borrowing programme is enhanced a further sell-off cannot be ruled out.

The 10-year bond yield on government bonds was trading at 7.43 percent on Tuesday, slightly lower than the closing seen on Monday.

There is an abundance of supply and the government may increase the limits set for Foreign Portfolio Investors in the bond markets to calm nerves. Last week the government announced that it would only borrow Rs 20,000 crores and not the Rs 50,000 crores as anticipated. This cooled the markets a little from the rout.

The mark to market losses for those holding government bonds may also increase. Interest rates have in any case firming up with State Bank of India going for a big jump in domestic interest rates. Bond yields are seen hitting the 8 per cent mark in the next few months and would be the highest seen in the last three years.

With inflation posing a big risk, interest rates are clearly headed higher.