Higher FY27 borrowing to keep bond yields under pressure; RBI support crucial

The Union Budget pegged gross market borrowings at Rs 17.2 lakh crore for FY27, a 16 percent increase over the current year’s budget estimate

• Govt's FY27 gross borrowing set at Rs 17.2 lakh crore, up 16% from FY26
• Higher bond supply may push yields up; RBI support seen as crucial
• 10-year bond yield expected to open 4-5 bps higher; focus on RBI policy ahead

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Yield on government securities is expected to see an upward pressure in the near term after the government announced a higher-than-expected gross market borrowing programme for financial year 2026-27, even as it stuck to its fiscal consolidation roadmap.

The Union Budget pegged gross market borrowings at Rs 17.2 lakh crore for FY27, a 16 percent increase over the current year’s budget estimate, while net market borrowing was set at Rs 11.7 lakh crore to finance a fiscal deficit of 4.3 percent of GDP.

Bond market participants said the headline fiscal numbers were largely reassuring, but the elevated gross supply of dated securities could weigh on yields until clarity emerges on demand conditions. This makes a strong case for support from the Reserve Bank of India which is critical to gauge the next course of direction for the market.

Why borrowings matter

Government borrowings are a key determinant of interest rates in the economy, and a higher supply of bonds typically puts upward pressure on yields unless matched by strong demand from banks, insurers, foreign investors, or RBI interventions.

“The fiscal deficit and net market borrowing numbers are largely in line with expectations and offer comfort to bond markets,” said Saurav Ghosh, co-founder of Jiraaf.

“However, the higher gross borrowing target of Rs 17.2 lakh crore is the key variable to watch and could keep G-sec yields under mild pressure in the near term until supply dynamics become clearer,” Ghosh added.

Impact on Monday’s opening trades

Further, Churchil Bhatt, Executive Vice President- Investment, Kotak Mahindra Life Insurance said, Net market borrowing is expected to finance slightly less than 70 percent of the fiscal deficit. However, Bond markets were anticipating a lower gross borrowing by way of dated securities (Rs 17.2 lakh crore as per budget). “As a result, 10-year bond yield may open 4-5 bps higher on Monday. Focus may shift thereafter to RBI policy outcome later in the week."

Rajeev Radhakrishnan, CIO–Fixed Income at SBI Mutual Fund, said the lack of explicit measures in the Budget to shore up bond demand could add to near-term pressure on yields.

“The overall gross and net borrowing numbers, along with the absence of any specific demand-side measures, will clearly weigh on market yields,” Radhakrishnan said. While broader fiscal consolidation and a reduction in the debt-to-GDP ratio are long-term positives, he added that the bond market would continue to rely on RBI’s open market operations to anchor yields in the near term.

In the immediate term, yields are likely to trade in a higher range, with Deepak Agrawal, CIO–Debt at Kotak Mahindra AMC, expecting the 10-year benchmark to hover between 6.65 percent and 6.75 percent.

Market participants will closely watch the RBI’s stance on liquidity, potential open market bond purchases, and guidance on interest rates to assess whether supply pressures can be offset in the coming months.

In the last few weeks, yield on the government securities, especially 10-year benchmark bond remained under pressure and touched a level seen in March, 2025. The bond yield rose to as high as 6.71 percent. This is due to dimming expectation of the rate by the RBI after healthy growth numbers and lower inflation.