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Finance Minister Nirmala Sitharaman presented the Union Budget 2026 in Parliament on Sunday, detailing the government's approach to foster economic growth by increasing capital expenditure while following a steady course of fiscal consolidation.

As per the Budget documents, the federal government of India is set to borrow a record ₹17.2 lakh crore for the 2026–27 fiscal year, surpassing most market expectations. This gross borrowing is 17% higher than the ₹14.61 lakh crore that was proposed for the current financial year. India's fiscal year operates from April to March.

The projected net borrowing for FY27 is expected to increase to ₹11.73 lakh crore, up from ₹11.33 lakh crore in the current fiscal year, according to the Budget.

Market participants had anticipated that gross borrowings would fall between ₹16 lakh crore and ₹17.5 lakh crore, with the median forecast from a Reuters survey of 35 economists at ₹16.3 lakh crore.

The unexpectedly high borrowing levels have heightened concerns regarding the strain on government bond yields.

In recent months, government bond yields have already risen as the extensive borrowings by both the Centre and state governments have surpassed the demand for sovereign debt.

Although bond markets were closed on Sunday, analysts indicated that the benchmark 10-year government bond yield might experience further increases when trading resumes on Monday.

Investors are concerned that the substantial amount of bonds available might sustain high yields, even with the Reserve Bank of India’s extraordinary support measures, which include record bond acquisitions and foreign-exchange swaps.

As per reports, Rajeev Radhakrishnan, who is the fixed income CIO at SBI Mutual Fund, stated that the overall gross and net borrowing figures, coupled with the lack of targeted measures to stimulate demand for bonds, will likely impact the market negatively.

He mentioned that in the near future, the performance of the bond market will largely hinge on the RBI’s open market interventions to stabilize yields. According to him, this level of borrowing poses a challenge and could lead to yields remaining high in comparison to the fundamental macroeconomic conditions.

The government, now focusing on a debt-to-GDP ratio as a primary fiscal benchmark, plans to reduce this ratio to 55.6% in the upcoming fiscal year. This aligns with a fiscal deficit goal of 4.3% of GDP, a crucial indicator monitored by investors due to its impact on borrowing requirements, debt sustainability, and overall market confidence.

Churchil Bhatt, Executive Vice President- Investment, Kotak Mahindra Life Insurance, said that the FY27 union budget highlighted the government’s commitment towards fiscal consolidation while retaining its push towards capital spending which is expected to grow by 11.5% to Rs12.2 lakh crore.

Bhatt added that fiscal deficit is pegged at 4.3% (against 4.4% in FY26). Net market borrowing is expected to finance slightly less than 70% of the fiscal deficit. However, Bond markets were anticipating a lower gross borrowing by way of dated securities (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,” said Churchil.

Further, Rajeev Radhakrishnan, CFA, CIO - Fixed Income, SBI Mutual Fund, added that even as broader fiscal consolidation measures and the reduction in the debt-to-GDP ratio are long-term positives, the bond market in the near term will continue to depend on RBI’s open market operations to anchor yields. This remains a challenge and could keep yields elevated relative to underlying macroeconomic numbers.

Anurag Mittal, Senior Executive Vice President & Head - Fixed Income, UTI AMC, believes that the budget is marginally bond heavy mainly on supply: gross borrowing of ₹17.2 lakh crore is above market expectations of ~ ₹16.5 lakh crore.

"The fiscal consolidation path looks broadly steady rather than meaningfully tighter, with FY27 debt-to-GDP guided at 55.6% versus the 55.2% street view. Near-term yields may see pressure, though demand remains supportive. We expect yield curve to remain steep. Moderate duration products like corporate bond funds or income plus arbitrage funds remain most attractive from risk reward perspective,”opined Mittal.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.

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