Finance minister Nirmala Sitharaman on Friday said the Union government is keeping a close watch on the rising yields on government bonds, which have a “big bearing” on the borrowings of both the Centre and states.

“I wouldn’t say I am concerned, but we are observing it, and it’s not affordable. Also, at a time when interest rates are otherwise low, bond yields becoming unsustainably high has a big bearing, not just for the Union government but state governments as well,” Sitharaman said in an interview with CNBC TV18.

The yield on 10-year bonds has increased from 6.18 per cent as of June 5, 2025 to a high of 6.61 per cent as of August 26, 2025 before correcting to 6.46 as of September 5, 2025. This notable volatility in recent months is despite a series of positive macroeconomic developments.

The Reserve Bank of India (RBI) implemented a 50 basis point (bps) policy rate cut in June 2025 and announced a 100 bps reduction in the Cash Reserve Ratio (CRR). Additionally, S&P upgraded India’s sovereign rating to BBB from BBB-, and headline inflation reached an eight-year low of 1.55 per cent in July, and GST rates have been rationalised.

Yet, bond yields have risen by 30–50 bps across the curve, with long-duration government bonds experiencing a pronounced impact.

“Following the front-loaded rate cut in June, the RBI’s subsequent stance and actions have signalled a more cautious approach, dampening expectations of further easing. The 100 bps cut in cash reserve ratio (CRR) significantly diminished the likelihood of the RBI conducting Open Market Operations to purchase bonds, removing a key source of demand and contributing to rising yields,” said Devang Shah, head - fixed income at Axis Mutual Fund.

“The cut in the Goods and Services Tax (GST) could strain the government’s fiscal balance, potentially leading to higher borrowing in the future. This expectation of increased debt supply also pushed yields higher. Changes in investment norms for pension funds and banks’ Held-to-Maturity (HTM) guidelines have also curtailed institutional appetite for long-duration bonds. Simultaneously, a higher supply of State Development Loans (SDLs) has further flooded the market,” Shah said, explaining reasons for the rising bond yield.

Despite the government estimating a fiscal hit of ₹48,000 crore from the GST overhaul, the finance minister indicated that the fiscal math of the central government “as of now is absolutely fine”.

The government has estimated a fiscal deficit of 4.4 per cent of GDP in 2025-26, lower than 4.8 per cent in 2024-25.

With consumption expected to get a boost from the GST rate reductions, the finance minister said that the government will be talking to the industry to pass on the benefit to the citizens.

“I am aware of the question coming from many citizens themselves who are saying it is great that you have brought in this kind of drastic cut in taxes, but how will you ensure we will benefit from it? We will have to keep talking with the industry, and we will have to nudge them,” Sitharaman said.

She also expressed optimism that the GST reforms would, to a large extent, offset the impact of US tariffs on the economy and indicated that there could be more announcements relating to further divestments coming soon from the government.