Actually there is a sharp link between bond yields and equity markets. With the government borrowing target likely to go up from Rs.7.8 trillion to Rs.12 trillion, bond yields on 11 May spurted by 22 bps in a single day to 6.19%. This is the sharpest single day bond yield spike in more than 3 years.

Higher borrowings would mean higher cost of funds for corporates and that could add to financial risk. But the bigger hit would be on the bond portfolios owned by banks and mutual funds. A spike in yields would mean a fall in bond prices and that could lead to further losses for bond holdings.

Higher borrowings could also crowd out private borrowers. The immediate worry will be that it puts India’s sovereign ratings at risk; as recently cautioned by Moody’s.