How will Budget 2025 impact fixed income investments, debt funds?

The central government's debt to GDP is expected to steadily decline from 57.1 percent in FY2024–2025 to less than 50 percent by FY2030–2031

Fixed income experts feel that  Budget 2025 has continued on the path of inclusive development by boosting personal spending while staying with fiscal consolidation. According to the experts, the fact that the government has maintained fiscal prudence is fundamentally positive for the bond market.

Per the budget,  the central government's debt-to-GDP ratio is expected to decline from 57.1 percent in FY24–25 to under 50 percent by FY30–31. This suggests that the fiscal deficit will be reduced by at least 0.2 percent of GDP annually after FY26.

At the same time, the fiscal consolidation trajectory has been sustained and the fiscal deficit  is estimated to be 4.4 percent of GDP in FY26, in line with estimates.

Post the budget announcement, India's 10-year benchmark yield was 0.016 percent higher, at 6.694 percent.

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Mahendra Kumar Jajoo, Chief investment Officer, Fixed Income, Mirae Asset Investment Managers, said, “Along with sustained capex, the economy is expected to regain  lost momentum in quick time. Continuing to adhere to the guided fiscal consolidation path even while providing tax relief is another positive feature, which should help improve India's ratings upgrade prospect. The RBI (Reserve Bank of India) is likely to take note of the same and a progressively more accommodative monetary policy is expected in the near term.”

Srikanth Subramanian, Co-Founder and CEO  at Ionic Wealth by Angel One, believes market borrowings were in line with expectations. “Further, continuing fiscal deficit management and capex levels broadly in line with last year means that the market trajectory and volatility may not change,” he said.

Word of caution

Rajeev Radhakrishnan, CIO,  Fixed Income, SBI Mutual Fund, is of the opinion that from a bond market perspective, the gross borrowing figure of Rs 14.8 lakh crore was higher than market estimates, and could be mildly negative. “However, RBI liquidity operations such as OMOs should ensure a supportive environment for yields,” he added.

Pankaj Pathak, Manager, Fixed Income, Quantum Mutual Fund, also believes that the market borrowing estimate for FY26 is a little higher than expected.

“Additionally, the government has set a higher target of Rs 2.5 lakh crore to switch near-maturity bonds to longer maturity bonds — effectively increasing the supply of long-term bonds in the year. The bond market would be somewhat disappointed as a result, and yields might go up next week,” Pathak explained.

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However, he added that since the overall  demand-supply dynamics are still favourable,  the negative effect on the bond market should be minimal and transient. Indeed, he continues to see strong demand for government bonds from domestic investors like banks, insurance companies, and pension funds.

Anurag Mittal, Head, Fixed Income, UTI Mutual Fund, also says that the government’s (long-term) borrowing number is marginally higher than bond market expectations as it has not kept any short-term borrowings.

Still, according to experts, there is a possibility of significant RBI buying in FY26 to provide durable liquidity to the banking system. All in all, they expect positive momentum in the bond market to continue with long-term yields declining further.