Bond Yields Remain Sticky Above 6.5%, Influenced by Tax Shortfalls and Bank Demand

Think of government bonds like IOUs that the government sells to borrow money.

The 'yield' is like the interest rate the government pays on these IOUs.

Even though the Reserve Bank of India has made borrowing cheaper by lowering a key interest rate, the rates for the government's long-term IOUs have stayed high, mostly above 6.5%.

This is worrying because it makes it more expensive for companies to borrow money too.

One big reason for this is that the government isn't collecting as much money from taxes as it expected.

Another issue is that banks, which usually buy a lot of these government IOUs, aren't buying as much.

This is because people's savings accounts aren't growing fast enough, and banks already have more of these government IOUs than they are required to.

However, foreign investors are buying more of these IOUs because the interest rates in India are more attractive compared to the United States.

The government has tried to help by changing when it sells its IOUs, and the Reserve Bank has signaled it doesn't want interest rates to go up too much.

Despite these efforts, it's hard to see these borrowing costs going down significantly soon, especially as there's less extra money flowing around in the financial system.