In her Budget speech, the Finance Minister said that the government will increase market borrowings to a record Rs 17.2 lakh crore (gross) in 2026-27. This number is higher than market expectations, and this announcement comes at a time when bond yields have risen amid heavy borrowing by the Center and the states.
On Friday, the benchmark yield on 10-year Treasury notes closed at 6.7%, up from 6.5% three months ago.Of the total borrowing in FY27, net market borrowing has been pegged at Rs 11.7 lakh crore, which is in line with market expectations. The gap of about Rs 5.5 lakh crore between gross and net borrowing reflects repayment of earlier debt, either on maturity or through conversion of existing securities into more liquid bonds.
Yield stress
“The higher-than-expected total borrowing of Rs 17.2 lakh crore could impact market sentiment as supply and demand imbalance is already impacting bond yields. We expect the 10-year bond yield to open higher tomorrow,” said Sakshi Gupta, chief economist at HDFC Bank.
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Government bond yields have been rising over the past few months as supply of paper has outstripped demand, with large issues by the Center and states weighing on the market. According to a bond trader, amid the uncertainty in the global market, interest in bonds is leaning more towards short-term papers; Ultra-long holding securities still have buyers such as insurance companies and pension funds. However, longer-term notes with maturities ranging from 5 to 15 years may experience a downward bias.
“The benchmark 10-year total yield is likely to move in the 6.65% to 6.8% range given the RBI’s commitment to contain any significant rise in yields through open market operations,” the bond trader said.Economists say that along with the volume of borrowing, the quality of spending matters. If the money goes to capital investment this is positive. “The budget proposes a capital expenditure of Rs 12.1 lakh crore, which is more than the net market borrowing of Rs 11.7 lakh crore.
“I pray that one day capital expenditure will be more than total borrowing including small savings,” said Nilesh Shah, managing director, Kotak Mahindra AMC.City councils find gate incentives for high fundingThe budget aims to stimulate the bond market, targeting liquidity, hedging depth and large municipal bond issuances through incentives.The Budget proposes to create a market for corporate bonds, facilitating access to financing and bond index derivatives to deepen the shallow market that provides an alternative to equity and bank financing.
It also offers total return swaps, allowing investors to earn bond returns without holding the paper, which will help manage risk and expand participation.To expand financing for urban infrastructure, the Budget provides an incentive of Rs 100 lakh crore for issuance of one municipal bond worth over Rs 1,000 lakh crore. This campaign targets cities with large civic budgets – Mumbai (budget of Rs 74,427 crore), Bengaluru (Rs 19,930 crore), Delhi (Rs 17,044 crore), Ahmedabad (Rs 15,502 crore), and Pune (Rs 12,618 crore). This incentive should reduce the cost of borrowing and the scope of issuance, building on previous gains for municipal bonds.The package also addresses liquidity constraints. Market making should narrow bid/ask spreads and maintain trading; Index derivatives/swaps can attract insurance companies/pension funds with lower rated exposures.
