The government’s gross borrowing through dated securities will be Rs 17.2 lakh crore in 2026-27, Finance Minister Nirmala Sitharaman announced in her Budget proposals.
The net borrowing from dated securities is estimated at Rs 11.7 lakh crore. The balance financing is expected to come from small savings and other sources, Sitharaman said.
The gross borrowing is higher than the expected level, which could negatively weigh on the market. This stems largely from a hefty Rs 5.5 lakh-crore repayment in FY27, rather than fresh funding needs.
Market participants had anticipated gross borrowing in the range of Rs 16-17 lakh crore for FY27. For FY26, the government budgeted gross market borrowings at Rs 14.8 lakh crore.
Impact on Bond Yields
“The Rs 17.2 lakh-crore gross issuance is significantly higher than the expectation. Combined with state government supplies, gross supply (Centre plus states) will be Rs 30.2 lakh crore. This would sharply push the G-Sec yields up,” said Guara Sengupta, chief economist, IDFC First Bank. She anticipates yields climbing as high as 6.85% in the aftermath.
Market participants expect the10-year yields to rise by 5-10 basis points (bps). The yield on the 10-year benchmark bond closed at 6.70% on Friday. In the last week, it touched an eleven-month high of 6.72%.
Yields, which have stayed elevated for a while due to unfavourable demand-supply dynamics and tightened liquidity, have gone up by 16 bps in the past three months. Large issuances of state development loans (SDLs) have also pressured the market.
“The overall gross and net borrowing numbers, along with the lack of any specific measures to address the demand for bonds, will clearly weigh on yields. This remains a challenge and could keep yields elevated relative to underlying macroeconomic numbers,” said Rajeev Radhakrishnan, CIO – fixed income, SBI Mutual Fund.
Madan Sabnavis, chief economist at Bank of Baroda, said while higher gross borrowing will lead to a rise in yields, the net borrowing figure aligns with forecasts and should temper some of the strain. “The RBI must keep injecting liquidity to manage the situation.”
Expectations for RBI Intervention
Market participants expect more bond purchases from the Reserve Bank of India (RBI) through open market operations (OMOs) to support demand-supply dynamics from higher gross borrowing.
“Initial reaction of the bond market would be negative and yield may touch 6.75%. If any buyback happens during the course of the year, which is quite possible, there is a possibility of gross borrowing coming down,” said VRC Reddy, treasury head, Karur Vysya Bank.
“With the Budget overhang behind us, the bond market’s focus shifts to liquidity conditions, macroeconomic data and the RBI actions to guide yield movements,” he added.
Sitharaman said the government has fulfilled its commitment to reduce the fiscal deficit to below 4.5% of the GDP by FY26. In FY26, the fiscal deficit was in line with the estimates at 4.4%. For the next fiscal, it has been pegged lower at 4.3%.
The debt-to-GDP ratio is estimated at 55.6% of the GDP in FY27, compared to 56.1% in FY26.
“Effectively, even as broader fiscal consolidation measures and the reduction in the debt-to-GDP ratio are long-term positives, the bond market in the near term will continue to depend on RBI’s open market operations to anchor yields,” said SBI Mutual Fund’s Radhakrishnan.
Market participants will now keenly monitor the RBI’s bi-monthly monetary policy committee meeting, scheduled for February 4-6.