Bond yields may harden; banks face MTM risks after higher govt borrowing: Neelkanth Mishra on Budget 2026

markets

Bond yields are likely to harden in the coming period, while banks could face mark-to-market losses on their bond portfolios following the government’s higher borrowing programme, according to Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital.

Speaking in an interview with Moneycontrol, Mishra said the government’s gross borrowing number came as a negative surprise for markets and has raised concerns about upward pressure on bond yields.

The Centre has pegged net market borrowing at Rs 11.7 lakh crore for FY27, about Rs 50,000 crore higher than FY26, reflecting a calibrated increase to support higher capital spending. Gross market borrowing has been set at Rs 17.2 lakh crore, marking a sharp rise from the current year.

Mishra said bond yields have continued to rise despite improvements in fiscal discipline and rate cuts by the Reserve Bank of India. He noted that rising yields are offsetting the benefits of fiscal consolidation, even as the government maintains a disciplined fiscal stance.

According to Mishra, the government’s assumptions around financing the fiscal deficit appear overly conservative, which could dilute the advantages of fiscal discipline.

He added that rising yields pose a direct risk to banks’ balance sheets, as higher yields translate into mark-to-market losses on bond holdings.

Mishra said banks may be compelled to sell government securities to raise liquidity, even at lower yields, adding further pressure on bond prices. He pointed out that if banks need 12-month liquidity at around 7 percent, they may be forced to sell government bonds yielding about 6.6 percent to 6.7 percent to meet liquidity needs.

“If the 10-year yields were to go up even from here, then the banks have to then book losses on their bond holdings,” Mishra said, adding that higher bond yields would also lead to an increase in borrowing costs for banks.

Watch full video here