The finance ministry will consult the Reserve Bank of India (RBI) on appropriate decisions needed to check high bond yields next month.

“We are examining and analysing, will take appropriate policy decisions. High bond yields put pressure on our finances. We have not increased our borrowing so significantly that the yields should go up. We will discuss with the RBI and then take a call before the end of next month,” an official source said.

The government has cited GST rollout as the reason behind for missing the fiscal deficit target of 3.2 per cent. It had borrowed Rs 20,000 crore as additional borrowing for the current financial year. Fiscal woes were compounded by lesser than expected GST revenues. As there was no spectrum auction, non-tax revenue was also hit. Further, dividends from public sector undertaking and RBI were lower. All these factors meant a revenue shortfall of Rs 55,000 crore. Pressure on the fiscal situation has mounted and inflation is already over 5 per cent although in January retail inflation eased marginally to 5.07 per cent as vegetable, fruit prices drop.
An analyst said there is not a permanent relationship between fiscal deficit and bond yields. They are governed purely by basic fundamentals of an economy where inflation is a key issue. It totally depends upon the stability of a country’s economy. If deficit is too high and the government has no other way to finance it other than bond issue, then public and investors will always demand a high yield as they will be skeptical that the government could print more money to pay their bond interest which ultimately raise inflation and their bond will loose its value. But if a country’s economy is too strong to handle the debt and investors have full faith on the economy like USA, UK, Japan, then bond yield rarely increases.