Decrease in GST Rates Leads to a Drop in Government Securities Returns
Published on September 4, 2025
Amidst the recent GST rate cuts, the Indian market has shown a mixed response. The BSE Sensex experienced a retreat of 650 points from its day's high, despite the GST rate reductions being generally viewed as a positive development, particularly during the festival season.
The Reserve Bank of India (RBI) accepted offers aggregating ₹1,50,023 crore at a weighted average rate of 5.49% in its 8-day variable rate reverse repo (VRRR) auction on September 4, 2025. This robust response indicates ample liquidity in the banking system, which contributed to the decline in the yield of the 10-year benchmark G-Sec.
The yield of the 10-year benchmark G-Sec, specifically GS 2035, decreased from 6.54% to 6.49%. The GST rate cuts had a salubrious impact on the yields of Government Securities, causing the yield to soften about 5 basis points. The 10-year benchmark G-Sec opened 1 basis point lower at 6.53% due to the easing of fears about extra borrowing in FY26 after the GST Council meeting.
RK Gurumurthy, Treasurer of Karnataka Bank, expressed concerns about potential revenue shortfalls and increased borrowings due to the GST cuts. However, he noted that the borrowing calendar will be announced later this month. Gurumurthy also highlighted the steepness of the rate curve as encouraging duration play. Once uncertainties about tariffs abate, bond yields are expected to return to levels seen in Q1, according to Nuvama Wealth Management's fixed income team.
The GST Council's decision to move to a two-slab goods and services tax rate structure is estimated to result in a net revenue loss of around ₹48,000 crore. Market players shrugged off fears that the Government may borrow more to overcome the fiscal impact of the GST rate cuts.
Four tranches of CRR (cash reserve ratio) cuts will start taking effect from Saturday, which will not drain up bond supplies or impact liquidity pricing, according to Gurumurthy. The specific banks that placed bids to deploy liquidity amounting to 1,80,955 crore rupees in the RBI's 8-day VRRR auction are not disclosed in the available sources.
The RBI-led Financial Stability and Development Council's Standing Committee on Supervision (FSDC-SC) is expected to closely monitor global trade and geopolitical frictions. Gurumurthy also expressed concerns about potential revenue shortfalls and increased borrowings due to the GST cuts, but noted that the borrowing calendar will be announced later this month.
RK Gurumurthy, in a separate statement, praised the GST rate cuts, stating that they are a positive development, particularly during the festival season. As of September 03, 2025, banks had surplus liquidity amounting to ₹2,97,367 crore, according to RBI data.
In conclusion, while the GST rate cuts have had a positive impact on the yields of Government Securities, the Indian market has shown a mixed response. The BSE Sensex experienced a retreat of 650 points from its day's high, suggesting that market participants may be cautious about the potential fiscal impact of the GST rate cuts.
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