Bond yields affect your money

HIGHER INFLATION

The 10-year government bond yield is above 8% now. Although a sharp increase in the bond yield doesn’t have a direct impact on you, it is an indicator of future interest rate. When there is a rise in the borrowing cost of government of India, it means there is a much higher risk in lending to the government. Simply put, the government is punished for exceeding its budget consistently. The market is trying to tell you that things are not in good order at macro level. Also, when there is expectation that future inflation is going to be higher, a higher yield is demanded today. So you will have to pay more for goods and services.

DEPRECIATING RUPEE

When there is higher inflation, you will see rupee depreciating, considering the higher fiscal spending. When your fiscal deficit rises, it in turn leads to higher interest rates, inflation and currency depreciation. Each of these elements is connected. Over the last few years, fiscal deficit was expected to come to 3% of GDP. Currently, it is at 3.5% of GDP and the state finances have got progressively worse. In the last one year, there has been deterioration in the fiscal position. When bond yield goes up, the market is telling you that inflation is rising, fiscal deficit worries are there and rupee is depreciating.

LENDING RATE

Typically, markets tend to be ahead of the Reserve Bank of India (RBI). If you see the 10-year yield was 6.40% last June, in February this year, we were close to the current levels. Since then, it has not moved much. But it is only in the last few months that RBI has raised rates by 50bps. Market was ahead of RBI by several months. Rising long term yields is a signal from the market that in the future, the central bank is likely to hike rates. However, it doesn’t tell you when the hike will happen. It just says that in the near-term it will happen. This means that your cost of borrowing will also go up.

WHO IS ELIGIBLE?

According to section 208 of the Income Tax Act, if the tax liability of a taxpayer is ₹10,000 or more in a financial year, you are liable to pay advance

income tax. It applies to all salaried, freelancers and businesses. Citizens aged 60 and above are exempt from

payment of advance tax.