Bond traders caught off-guard as talk of limited fiscal space gains ground

A gauge of volatility for India's 10-year sovereign bonds rose to an eight-month high

It’s getting hard to keep track of just what one should do with Indian bonds.

A rally Friday morning after the central bank signaled more rate cuts turned into the biggest rout in eight months after the government’s unexpected cut in corporate tax raised the specter of missing deficit targets.

Losses were pared Monday after Finance Minister Nirmala Sitharaman said the government won’t consider expanding its already record borrowings till much later. Traders though remain cautious, with Standard Chartered Plc forecasting the need for as much as 800 billion rupees ($11.3 billion) of new debt.

“Market participants were caught off-guard with the fiscal