The yield on the 10-year government bond closed 15 basis points higher on Friday, its biggest jump in nearly nine months, due to concerns over fiscal slippage, after finance minister Nirmala Sitharaman slashed corporate tax rates for domestic companies.

The 10-year bond yield rose 23 basis points during intra-day trading. At closing, the yield settled at 6.789%, up 15bps—its maximum gain since 7 January—from its previous close of 6.64%. Bond yields and prices move in opposite directions.

Yes Securities senior president and head, institutional equities, Amar Ambani said with nominal gross domestic product (GDP) projected to grow by 9.3% to ₹207.8 trillion in fiscal year 2020, a tax revenue of ₹1.45 trillion forgone will translate into an impact of 70bps on the fiscal deficit. As a result, the fiscal deficit can rise to 4% of GDP for FY20, as a worst-case scenario, compared with budgeted projections of 3.3%.

However, the transfer of RBI’s excess reserves to the government’s kitty can help soften the blow to an extent. In addition to the regular dividend income, the transfer of ₹52,600 crore (0.3% of GDP) by RBI is a clear windfall for the government as this was not budgeted. This is likely to partially offset the build-up of fiscal consolidation risk from a likely shortfall in tax revenue collection this year, Ambani added.

Ambani said Yes Securities senses a decent chance of the government attaining a disinvestment target of ₹1.05 trillion, considering the likely congenial environment in the capital markets now. Besides, the various stimulus measures might result in some tax buoyancy, though the upfront recapitalization of public sector banks by ₹70,000 crore (0.3% of GDP) will have some fiscal impact.

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Yes Securities estimated a fiscal deficit of around 3.7% of GDP for FY20 in a report on Friday.

Sitharaman said the government was aware of the consequences of the revenue hit due to the measures announced on Friday. She said the revenue loss to the exchequer will be ₹1.45 trillion in FY20. “We are conscious of the impact all this will have on our fiscal deficit, and will reconcile the numbers," she told reporters.

“The fiscal stimulus has come at the cost of fiscal slippage. The bond yields have reacted and hardened immediately. However, the subsequent rate cut by RBI and comfortable liquidity situation can keep the bond yields in check, at least on the short end of the yield curve," said Gaurav Dua, senior vice president and head of capital market strategy and investments at brokerage firm Sharekhan by BNP Paribas.

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