The Union Budget has kept government borrowing largely in line with expectations, providing bond traders with little cause for concern. Gross market borrowing for FY26 is set at Rs 14.62 lakh crore, slightly higher than Rs 14.01 lakh crore in FY25, but manageable given strong domestic demand and the Reserve Bank of India’s (RBI) active bond purchases.
With redemptions of Rs 4 lakh crore due this year, net borrowing is projected to decline slightly to Rs 11.54 lakh crore from Rs 11.63 lakh crore in FY25. The government’s preference for long-term bonds continues, benefiting from the growing investment appetite of insurance companies and pension funds. This has kept long-duration bond yields flat, ensuring stable borrowing costs.
Foreign investor participation has been lower than expected despite India’s inclusion in global bond indices, but robust domestic demand has more than compensated. The decision to maintain net short-term borrowing from treasury bills at zero also helps stabilise liquidity conditions, aligning with the RBI’s recent liquidity management efforts. The central bank has already purchased Rs 31,000 crore in bonds through open market operations and may continue such interventions.
Fiscal deficit in check
While bond supply remains significant, the fiscal deficit target for FY26 provides comfort to investors. The government has pegged the fiscal deficit at 4.4% of GDP, lower than market expectations of 4.5% and a notable improvement from the revised estimate of 4.8% for FY25.
A declining fiscal deficit signals that government finances remain in check, reducing the risk of unexpected borrowing spikes. The RBI, in its role as the government’s banker, also plays a key part in ensuring that borrowing costs remain reasonable.
With no major surprises in the borrowing programme, the outlook for the bond market remains positive. Fund managers anticipate that the 10-year bond yield could decline further, potentially falling to 6.5% or lower. However, much will depend on the RBI’s upcoming monetary policy decision. If the central bank moves to cut its policy rate, it could provide additional support for bonds and drive yields lower.
