All eyes on bonds as budget springs a borrowing surprise

Higher yields may greet traders as the government bond market opens on Monday, as a higher-than expected gross market borrowing programme and an elevated capital expenditure plan hang heavy.

“To finance the fiscal deficit, the net market borrowings from dated securities are estimated at ₹11.7 lakh crore. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at ₹17.2 lakh crore,” finance minister Nirmala Sitharaman said while presenting the Union Budget for 2026-27.

According to the median estimate of 21 economists in a Bloomberg survey, gross market borrowing for FY27 was expected at ₹16.5 trillion and net borrowing, which excludes repayments, would be at ₹11.6 trillion. For FY26, the government had budgeted gross market borrowings of Rs14.8 lakh crore and net borrowing of ₹12.5 lakh crore.

“The overall gross and net borrowing numbers, along with the lack of any specific measures to address demand for bonds, will clearly weigh on market yields….This remains a challenge and could keep yields elevated relative to underlying macroeconomic numbers,” Rajeev Radhakrishnan, chief investment officer of fixed income at SBI Mutual Fund said.

Market participants expect yield on the 10-year benchmark government bond to rise as much as 6.80%, but trade in the range of 6.60-6.77%. On Friday, yield on the same bond closed at 6.70%, its highest in over 10 months as traders remained concerned over bond supply, according to Bloomberg.

“Fiscal deficit is pegged at 4.3% (against 4.4% in FY26). Net market borrowing is expected to finance slightly less than 70% of the fiscal deficit. However, bond markets were anticipating a lower gross borrowing by way of dated securities. As a result, 10-year bond yields may open 4-5 bps higher on Monday,” Churchil Bhatt, executive vice-president of investment at Kotak Mahindra Life Insurance said.

What remains to be seen is whether the high gross market borrowing and its subsequent impact on yields will nudge the central bank to infuse further liquidity in the system.

While the net borrowing number is largely in line with market expectations, higher gross borrowing programme, with large maturities amounting to ₹5.5 trillion and a heavy state issuance keeping supply elevated already is likely to weigh, market participants said.

“While the gross borrowing number is about ₹1 lakh crore above market expectations, the absence of immediate buybacks makes the headline figure look elevated. That said, based on past trends, buybacks during the course of the year remain a strong possibility, which could eventually bring down the effective gross borrowing. Overall, with net supply largely in line and potential buybacks later in the year, the yield impact is expected to remain contained,” V.C.R. Reddy, treasury head at Karur Vysya Bank said.

Further, higher capital expenditure of ₹12.2 trillion for the next fiscal year against expectations of ₹11.2 trillion in the current year will also dampen investor sentiment as concerns over supply will increase.

Such announcements have come as bond yields already remain high due to limited participation from long-term investors, tight liquidity conditions owing to the rupee’s slide toward 92 per dollar as the Reserve Bank of India intervenes to stabilize the currency and absorb liquidity.

“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,” Radhakrishnan said.

While the RBI has advanced its open market operation purchases by a week to help inject liquidity in the banking system, investors now turn their focus to the meeting of the Monetary Policy Committee scheduled later this week on 4-6 February.