Gilt Yields Climb on GST Overhaul Amid Fiscal Concerns; Biggest Weekly Rise in 3 Years

HIGHLIGHTS

• Gadkari blames petroleum lobby for fuelling ethanol blending controversy
• Indranil Bhattacharyya joins RBI's MPC as ex-officio member
• IRDAI considers capping health insurance premium hikes, consultation paper likely soon
• Rajiv Bajaj backs GST cut for 2-wheelers, warns against unnecessary classifications
• Vodafone shares zoom 8% on reports of AGR relief package from govt

Indian equities ended a six-day winning streak on Friday, August 22, with financial stocks leading a sharp correction. The Sensex dropped 694 points to close at 81,307, while the Nifty fell 214 points to 24,870, slipping back below the 24,900 level.

Banking shares dragged benchmarks lower, as the Nifty Bank tumbled 606 points, or over 1%, to 55,149. Market breadth also turned negative, with the advance-decline ratio at 2:3, as more than 40 Nifty constituents closed in the red and nearly 10 names shed over 2%. Midcaps were relatively steady, with the index easing just 79 points to 57,630.

 Sectoral performance
Among sectors, media and pharma managed modest gains of 1% and 0.4%, respectively, while metals, IT, FMCG, oil & gas, realty, and banking counters witnessed declines in the range of 0.5–1%. Consumption-related stocks faced profit booking after recent rallies.

In stock-specific action, R Systems jumped 9% after announcing the ₹4 billion acquisition of Novigo. Defence names broadly gained, though Mazagon Dock slipped 2% following a negative brokerage note. In the broader market, Nazara Technologies dropped 4% as PokerBaazi suspended real-money gaming operations. 

Vodafone Idea surged 8% after reports that the Department of Telecommunications may ease rules on adjusted gross revenue dues. AB Fashion, Poonawalla Fincorp, and SJVN saw gains from short covering ahead of their exit from the derivatives segment this month.

Top Gainers	% Change	Top Losers	% Change
NIFTY MEDIA	0.95%	NIFTY METAL	-1.25%
NIFTY PHARMA	0.39%	NIFTY PSU BANK	-1.12%
NIFTY HEALTHCARE INDEX	0.11%	NIFTY BANK	-1.09%
NIFTY CONSUMER DURABLES	0.10%	NIFTY PRIVATE BANK	-1.06%
		NIFTY FMCG	-1.00%

Indian government bonds came under heavy pressure this week, with the 10-year benchmark gilt yield registering its sharpest rise in over three years. The yield climbed 15 basis points to close at 6.55%, its highest since March 28, marking the steepest weekly gain since May 2022.

The selloff was triggered by Prime Minister Narendra Modi’s proposed overhaul of the goods and services tax. The move to a simplified two-rate structure of 5% and 18%, scrapping the 12% and 28% slabs, has raised investor fears of fiscal slippage and the likelihood of additional government borrowing. A state ministers’ panel endorsed the plan, deepening concerns that the fiscal burden will rise, pushing yields higher.

Traders noted that the bond market is already grappling with heavy supply pressures. The government auctioned 300 billion rupees of the benchmark bond on Friday, close to expected levels, but demand remained cautious.

Market participants now await Federal Reserve Chair Jerome Powell’s address at the Jackson Hole symposium. While global investors are pricing in the possibility of a US rate cut in September, analysts caution that Powell may refrain from strong commitments until inflation shows clearer signs of easing, keeping volatility elevated for Indian bonds.

Tenure	Today	Previous
10-year Gilt	6.55%	6.53%
5-year gilt	6.29%	6.28%
5-year OIS	5.73%	5.73%

The Indian rupee ended the week on a softer note, closing at 87.53 per US dollar on Friday, down 0.3% from the previous session, as global and domestic factors combined to weigh on sentiment. The currency’s weakness capped a volatile week marked by sharp swings, largely driven by tariff concerns and the anticipation of Federal Reserve Chair Jerome Powell’s Jackson Hole speech.

Through the week, the rupee briefly strengthened after Prime Minister Narendra Modi’s proposed tax reforms boosted equities and improved appetite for risk assets. However, the reprieve proved short-lived, as renewed anxiety over steep US tariffs on Indian exports, scheduled to take effect on August 27, pressured the currency. Importers and oil companies stepped up dollar purchases once the rupee crossed the 87 mark, adding to the downward drift.

Market participants noted that foreign banks were net sellers, though overall flows remained modest. Forward premiums stayed broadly stable but hovered at the higher end of the spread, reflecting the wide rate differential between India and the US. 

Unit	Today	Previous
Dollar/Rupee	87.53	87.27
Dollar Index	98.72	98.25
1-year Dollar/rupee premium (%)	2.14%	2.16%

OUTLOOK
Indian equities will likely trade with a positive bias, supported by expectations of Goods and Services Tax rationalisation and its potential to lift consumption. Sectors such as FMCG, autos, and consumer durables will continue to attract investor interest, with hopes of tax cuts spurring demand. However, profit booking in some sectors may persist after recent volatility, keeping benchmark indices in a broad range. 

Foreign institutional flows will depend on clarity around global trade tensions and any progress on US tariff decisions. Broader markets may outperform as investors rotate into mid- and small-cap counters tied to domestic growth themes.

Government bond yields will likely remain elevated after this week’s steep selloff, as fiscal risks tied to GST rate restructuring will keep supply concerns in focus. The benchmark 10-year yield will stay under upward pressure, with traders cautious ahead of additional borrowing announcements. While some demand from long-term investors may emerge at higher yield levels, sustained relief will be difficult unless the government outlines credible fiscal consolidation steps. Global cues, particularly from the Federal Reserve, will also shape sentiment, with hawkish commentary adding to headwinds.

The Indian rupee will remain under pressure as dollar demand from importers and strength in the greenback weigh on the currency. Investors will closely monitor US tariff announcements and Fed Chair Jerome Powell’s remarks at Jackson Hole for directional cues. Any hawkish stance will likely fuel further dollar strength, keeping the rupee vulnerable. Near-term trading is expected in the 87.30–87.80 range, with risks skewed towards depreciation if global uncertainties intensify.

Key Events & Data Due Monday:

Economic Data

• German August Ifo Business Climate Index
• US July building permits data

Corporate Actions

• Earnings: M & B Engineering, Valecha Engineering, and Godha Cabcon & Insulation
• Fedbank Financial Services to consider fund raising

Policy Events

• German Buba Balz speaks