Govt likely to focus on fiscal consolidation in Budget 2026: Mirae Asset Investment Managers' head of fixed income

Basant Bafna, the head of fixed income at Mirae Asset Investment Managers (India), believes the government will keep fiscal consolidation in focus while maintaining growth momentum in Budget 2026. He says central government borrowings may remain stable, while state borrowings are likely to rise compared to FY26. In an interview with Mint, Bafna shares his views on how the government's increased focus on fiscal consolidation may impact bond yields and spread, among other things.

Edited excerpts:

What are your key budget expectations? How could increased focus on fiscal consolidation impact bond yields and spreads?

India’s fiscal consolidation story remains intact, though the pace is likely to moderate.

The government remains committed to a steady fiscal consolidation path, with the debt-to-GDP ratio expected to ease from nearly 56% to close to 50% over the next five years, supported by strong growth.

This growth is expected to be driven by steady government capital expenditure with tailwinds accruing on account of GST rationalisation.

However, near-term revenue pressures persist, and bridging this gap may require greater reliance on disinvestment and asset monetisation.

Overall, the government appears committed to consolidation over populism, balancing growth-oriented spending with fiscal discipline.

On the bond market front, expectations on net borrowings for FY27 remain in the range of nearly ₹11.5 -12 trillion, broadly in line with FY26 levels of ₹11.3 trillion.

While central government borrowings are expected to remain stable, state borrowings are likely to rise compared to FY26.

While yields on central government securities are expected to remain supported as the government remains committed to fiscal consolidation and as prevailing spreads remain higher vis-à-vis historical averages, elevated supply on SDLs, coupled with muted demand, suggests limited scope for yield compression, with spreads expected to remain firm.

Should investors tweak their debt portfolios ahead of the Union Budget?

Given that the upcoming budget is expected to maintain its long-term emphasis on fiscal consolidation alongside growth, the outlook for fixed income remains steady.

With the government’s commitment to balancing expenditure with debt reduction, there is little indication of any abrupt policy shift that would warrant portfolio adjustments.

From this perspective, investors need not make significant changes to their debt holdings ahead of the Union Budget, as the broader trajectory of consolidation and growth remains intact.

What are your expectations on RBI policy and rate trajectory? What should be our bond investment strategy if more rate cuts occur?

The RBI has already frontloaded 125 basis points of rate cuts in 2025, leaving limited room for further easing in the near term.

While the scope for additional cuts would likely be contingent on growth slipping below 6% or inflation undershooting expectations, policy focus is expected to remain on transmission of rate cuts already undertaken to date.

There may likely be potential tailwinds on account of the new CPI series, which is expected to be published in February, in case the same significantly undershoots expectations, thereby opening up policy space for additional rate cuts.

On the investment strategy for the near term, demand-supply dynamics are expected to drive yields for the corporate debt segment.

While yields remain elevated in the near term owing to supply pressures on account of high credit-deposit ratios for banks, the medium-term trajectory remains constructive as inflation remains contained and instrument spreads remain high vis-à-vis historical averages.

In this background, a balanced barbell strategy - combining accrual with selective duration exposure would be prudent to navigate potential rate movements while managing supply-side pressures.

Given the geopolitical uncertainties, is it the right time to increase exposure to bonds?

Amid ongoing geopolitical uncertainties, bond spreads remain elevated compared to their three-year averages.

The AAA PSU Corporate Bond spreads over corresponding sovereign yields for the two-year segment, which typically averages around 80 basis points, currently stands at nearly 120 bps; with five-year spreads at nearly 80 bps vs historical average spreads of nearly 70 bps; and the 10-year spreads at nearly 80 bps vs historical average spreads of nearly 55 bps.

With the RBI continuing to take measures to ensure smooth liquidity transmission, and as global volatility gradually stabilises, there is potential for spread compression to play out as policy transmission takes place.

That said, the decision to increase bond exposure should ultimately be guided by an investor’s risk appetite and investment horizon, as the opportunity is not without its sensitivities to broader market dynamics.

How can retail investors invest in overseas bonds? Are there some key risks that they should be aware of while looking at foreign bonds?

Indian investors currently have access to select global debt funds, particularly those focused on US fixed income markets.

However, investing in such instruments requires a nuanced understanding of global interest rate cycles and currency risk.

These funds can offer diversification benefits, but should be approached with a clear view of one’s risk tolerance and investment horizon.

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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.