Hunky dory, or not?

"The net direct tax collections rose 7% year-on-year to Rs 12.92 trillion as of 10 November, reflecting steady inflows from corporate and personal income taxes despite moderation in overall growth compared to last year." "Analysts say part of the slowdown stems from the personal income tax relief announced in this year's budget, which is expected to cost the exchequer around Rs 1 trillion." Mint. Even if not as robust as last year, an increase means wages and earnings have risen this financial year starting 1 April. This plus," India's sweeping consumption tax cut drove shoppers to splurge on items from cars to kitchenware during the month-long festival season," as "Sales across the country topped Rs 6 trillion ($67.6 billion), with items like jewelry, electronics, apparel, furnishings and sweets most in demand." ET. This is the Laffer Curve  (wikipedia) at its summit. Despite this spending frenzy consumer price index (CPI) inflation dropped to a record low of 0.25% in October. ET. Since a rise in prices means a fall in the value of the currency this should support the exchange rate of the Indian Rupee. "On a day-to-day basis, the rupee-dollar exchange rate fluctuates in response to actual and expected dollar flows. But in the long run, exchange rate depreciation tends to be related to inflation differences between economies, as per the theory of purchasing power parity." Since the inflation differential with the US has fallen the rupee may stop falling and, may even appreciate, against the dollar. Wrote Deepa Vasudevan. In 1947 one US dollar bought Rs 3.3, in 2000 the rate was Rs 44.94 (bookmyforex.com) and is trading at Rs 88.44 this morning (xe.com). Which means the rupee has depreciated on average by just over 1% since 1947 and by 1.72% since 2000 against the USD. While the inflation rate has collapsed to 0.25%, the Monetary Policy Committee of the Reserve Bank of India (RBI) held its policy rate at 5.50% on 1 October 2025. pib.gov.in. Which means that "the real repo rate - nominal repo rate minus inflation - in October now stands at 5.25%, the highest monthly number since January 2012 since when we have monthly inflation data in the current CPI series," wrote Roshan Kishore. When the cost of borrowing is so much higher than inflation it provides ammunition to the RBI to slash its policy rate at its next meeting on 3 December. The bond market should be anticipating a fall in interest rates on government of India (GOI) bonds, which are highly safe, and rushing to buy these bonds to lock in high yields. The market reaction would increase the price of bonds and reduce yields. Surprisingly, that has not happened. Yields on the benchmark 10-year GOI bonds actually rose from 6.483% on 12 November when the CPI inflation rate was announced to 6.536% on 17 November. It has fallen slightly to 6.512% today, but is still higher than on the 12th. in.investing.com. "Indian government bonds fell further on Friday (14 Nov), as traders braced for a heavy debt supply and as a cash withdrawal operation from the central bank took the market by surprise." "New Delhi plans to raise Rs 280 billion ($3.2 billion) through sales of 15-year and 40-year bonds.. Traders are wary before the auction as the demand for long-term bonds has waned." ET. We are told everything is hunky dory. Is it? If the bond market can't make out, how can we?