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Informist, Sunday, Feb. 1, 2026

 

By Aaryan Khanna

 

NEW DELHI – The government's record gross borrowing target of INR 17.20 trillion for 2026-27 (Apr-Mar) is sure to roil the bond market when it opens to trade Monday. While the supply is higher than expected, bond traders said they may find enough demand to fund the government over the course of the year – given enough time and support from the Reserve Bank of India.

 

Economic Affairs Secretary Anuradha Thakur said the market borrowing is not on the higher side, with the net market borrowing of INR 11.73 trillion pushing the gross supply to a record because of higher redemptions. To be sure, an Informist poll had put the net market borrowing at INR 11.6 trillion and the revised estimate for FY26 is INR 11.33 trillion. But all respondents to that poll had pegged the net Treasury bill issuance at INR 1 trillion or lower. The government blew past those expectations, telling investors to expect a net issuance of INR 1.30 trillion through net short-term borrowing.

 

There was also no indication from the government that it was in a position to bring down its FY27 redemptions from INR 5.47 trillion any further, either through switches with the RBI or through buy backs. The gross market borrowing is INR 900 billion higher than the median of the Informist poll of 30 analysts and sharply up from INR 14.61 trillion in FY26. The Centre also did not have the accounting benefit of repaying bonds through the collections of the compensation cess on the Goods and Services Tax, as it had done in the last three financial years.

 

"In my experience, the gross supply matters more than the net supply for the market...over time, yields (on the 10-year benchmark) should go higher and rise past 7% in FY27 as supply keeps coming," Ritesh Bhusari, deputy treasury head at South Indian Bank said. The yield on the 10-year benchmark Friday ended at 6.70%, and is seen at 6.65-7.00% until the financial year ends in March. For context, the yield was 6.66?fore the current rate-cut cycle started in February 2025. In FY27, the trading range may rise to 6.80-7.25%.

 

KNIGHT IN RBI ARMOUR?

The first line of defence to cap bond yields will likely be the RBI, dealers said. Even without the central bank showing its hand, traders widely expect the RBI to express its displeasure with high yields through its actions. The RBI has conducted or announced gilt purchases worth around INR 7 trillion in FY26 so far. Among its latest actions, it bought bonds worth INR 126.55 billion in the secondary market in the week to Jan. 23, while picking up gilts worth INR 500 billion at an auction under its open market operations that week.

 

As the 10-year yield rose to near 6.70% in December, a psychologically crucial level for bond traders, the central bank has both bought gilts in the secondary market, announced fresh open market operation auctions, and advanced its bond purchases. Though all these measures are "primarily" used to infuse liquidity as RBI officials have said, market watchers cannot help but sense the government's debt manager is trying its best to keep borrowing costs in check. Traders have pencilled in net RBI gilt purchases of INR 4 trillion to INR 5 trillion in FY27 to help the borrowing programme sail through.

 

"The central bank has been amongst the bigger buyers of GSecs (government securities) in the past year and this is likely to continue until the domestic players, led by banks make a comeback to better balance the supply-demand mix," Radhika Rao, senior economist at DBS Bank, said in a report.

 

Immediate demand for bonds isn't seen coming from any other route. Foreign portfolio investors are not expected to pick up the slack in demand, as they are unlikely to be enthused with Indian bonds as the country's fiscal consolidation peters out. The Centre has targetted a debt-to-GDP ratio of 55.6% by the end of FY27, 50 bps higher than the consensus expectation of 55.1%. The domestic currency also hit a record closing low of 91.98 against the dollar Friday and is expected to weaken further. Moreover, India's fully accessible route bonds are still on review for being added to Bloomberg's flagship Global Aggregate Index till at least June, disappointing investors who had bet on their inclusion in January.

 

After the Budget, Moody's Ratings said the Indian government's steps to bolster economic growth over the past year will worsen its ability to afford debt. The government cut income taxes in the FY26 Budget before overhauling its indirect tax regime in September to spur domestic demand amid global uncertainty. Budget documents showed the government expects to spend 20 paise of every rupee it earns on interest payments for the fifth straight year in FY27. Or to use another metric, the government's interest payments will be 39.8% of its revenue receipts in FY27, up from 38.1% for FY26 as per the revised estimates and up from 37.3% over the budget estimate for FY26.

 

"...the gross market borrowing at Rs 17.2 lakh crores (INR 17.2 trillion) will continue to push bond yields under pressure," said Mridul Saggar, former executive director at the central bank. "RBI has its task cut out in managing such large borrowing. This might not be easy as market response to the switch auctions could be poor and fall short of budgeted Rs 2.5 lakh crore (INR 2.5 trillion). Such a large amount may only go through with higher market-distorting yields."

 

PUTTING UP MONEY

In a pre-Budget report, Goldman Sachs had charted out sources of demand for the government bond market in FY27 that most traders have largely mirrored after the Budget's presentation. Banks are expected to pick up INR 5.5 trillion of central and state government bonds on a net basis in FY27, around INR 1.3 trillion more than the current financial year, the report said. Bolstering their appetite would be double-digit deposit growth, the need to replace bonds sold to the RBI at OMOs, and attractive "carry" – the interest income earned over the funding cost by holding gilts to maturity.

 

"I think the gap that was there this year would be lower next year in terms of demand and supply because of the net issuance of g-sec has hardly gone up," a senior treasury official at a large state-owned bank said. "Sure, there will be a knee-jerk reaction but I don't think yields will be able to sustain above 6.80% in an environment where the RBI is still buying and banks have replacement demand." Banks' excess holdings of government bonds over the requirement under the statutory liquidity ratio have fallen in FY26 and the large gilt redemptions in FY27 will further lead to a churn in portfolios, the official said.

 

Already, the five-year benchmark gilt yields 110 basis points more than the policy repo rate of 5.25%. The seven- and 10-year benchmarks offered around 145 bps of carry Friday and all these yields are expected to shoot up Monday. Bets on further rate cuts in February and beyond are marginal, though analysts and some market participants still hope for further monetary policy easing through liquidity injections. The RBI's best efforts in bolstering durable liquidity have been stymied by slow government spending in recent months, though that is expected to pick up and add to banking system liquidity towards the end of the financial year.

 

Some banks have also indicated their preference for gilts over state bonds going ahead, despite the lower yields on offer. Banks' bond portfolios have tilted towards state government securities in recent months, having sold gilts to the RBI while absorbing the heavy supply of state bonds. The projected supply of state bonds in FY26 is 16% higher at a record INR 12.5 trillion, a key factor for the recent rise in yields on all government securities. Traders said the spread of state bonds over gilts may remain wide with a gross borrowing of INR 12 trillion to INR 13 trillion expected from states as well. This spread is now over 100 bps for some tenures, sharply up from around 40 bps a year ago.

 

"A big spike in liquidity from the RBI, or a softer stance (by the Monetary Policy Committee) could drive demand for short-term bonds but demand for belly and long-term securities will be limited. This should keep the curve on the steeper side (before the Apr-Sept borrowing calendar is announced in March)," South Indian Bank's Bhusari said.

 

That's not a consensus view, considering the sharp swing in net short-term borrowing in the last three fiscal years. The government's estimate for its net short term borrowing in FY25 is (-) INR 1.60 trillion, nil in FY26, and INR 1.3 trillion in FY27. Interestingly, the Budget has estimated a net issuance of INR 276.02 billion of 14-day T-bills in FY27. The 14-day intermediate T-bills are non-marketable and typically issued against state governments parking their excess cash with the Centre. Even discounting these, T-bill auction cut-off yields are expected to continue charting multi-month highs owing to the larger expected supply. This will in turn push up yields on bonds of up to three years' maturity.

 

To keep long-term bond yields in check, the government is expected to bring down its weighted average maturity of dated securities in the coming fiscal. The Centre's Oct-Mar borrowing calendar cut the issuance of bonds maturing in 30 years or more to 35% of the supply from over 39% in the first half.

 

Long-term investors are making a comeback to buying bonds after a partial hiatus caused by regulatory changes. Both pension funds and provident funds were allowed to increase their investments in equity and were investing heavily in shares since mid-2025, a trend that seems to have ended in January. Life insurers spent a chunk of 2025 reworking their product mix after the insurance regulator changed norms for accounting premium income from long-term policies but have stepped up bond purchases since December, dealers said. The return of these investors may lead the market back to a "normal" state, but optimism is limited after the Budget did not roll out tax sops for fixed income investment as some traders had anticipated.

 

"The borrowing number is a negative for the market but I don't think it's going to blow yields up," said Deepak Agrawal, chief investment officer - debt at Kotak Mahindra Asset Management Co. "We should certainly see some buying come in as the market reprices, and so the 10-year (gilt) yield should be between 6.65-6.85% in the next two months."

 

GLIMMERS ON THE EDGE

Some dealers also held on to the hope that FY27 may end up being better than budgeted for the government. Gross tax buoyancy is projected at a meagre 0.8 times the projected nominal GDP growth of 10% in FY27, lower than the buoyancy of 0.9-1.8 times seen since FY22. Borrowings from the National Small Savings Fund are also seen only marginally higher at INR 3.86 trillion in FY27 from INR 3.72 trillion in the revised estimate for FY26. As a share of funding the fiscal deficit, the share of small savings is expected to fall to 22.8% in FY27 from 23.9% in the current fiscal.

 

Traders were also confused with other receipts, from internal debt and the public account, showing an expected outflow of INR 458.01 billion in the next financial year, leading to a wider fiscal deficit. This was the first negative reading on that head since FY16. An expected repayment of public account liabilities other than state provident funds was responsible for most of the drain, according to the Budget documents. Some dealers said a reduction in this to the normal run-rate may help the government budget for bond buybacks in the next financial year, bringing down hefty redemptions in FY28 and beyond. 

"It is possible that the RBI does a switch later in the year to lower gross market borrowing, though no announcement has been made so far," HSBC economists led by Pranjul Bhandari said in a report after the Budget. "Also worth noting that the government has assumed small savings funding to grow by a small 4% y-o-y. This could come in higher, lowering the pressure from market borrowing."  End

 

With inputs from Pratiksha

Edited by Ashish Shirke

 

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