The Union Budget for FY27 has stayed the course on fiscal prudence, resisting the political temptation to expand cash transfers and welfare spending ahead of key Assembly elections. This commitment has been widely welcomed. Yet beneath the surface of fiscal discipline lies a growing concern: can India’s bond market comfortably absorb the Centre’s rising borrowing needs without pushing up costs for the entire economy?
Fiscal Prudence, But Borrowing Still Rises
Despite expenditure restraint, the Centre’s gross market borrowing for FY27 is pegged at ₹17.2 lakh crore — about 16% higher than the budgeted borrowing for FY26. This sharp increase has unsettled the bond market, where investors are increasingly wary of the volume of government securities (G-secs) that must be absorbed.
The nervousness is evident in rising yields, signalling concerns not about fiscal intent, but about market capacity and demand.
Debt-to-GDP as the New Fiscal Anchor
India’s public debt surged during the pandemic and has remained elevated due to sustained capital expenditure and rigid revenue spending. By September 2025, outstanding central government dated securities stood at ₹121.37 lakh crore, while State government securities accounted for another ₹67.21 lakh crore.
This represents nearly a doubling of central government borrowings since September 2019. The Centre’s market borrowing has grown at a compound annual growth rate (CAGR) of 11.5%, while States have borrowed even faster, at 13.8%.
Globally, this trend is not unusual. According to the International Monetary Fund, global public debt is projected to cross $100 trillion by the end of 2025, as governments struggle with geopolitical shocks, slower growth and post-pandemic support measures.
Against this backdrop, India’s decision to anchor fiscal policy to the debt-to-GDP ratio from FY26 onwards is significant. Unlike a rigid fiscal deficit target, this anchor allows flexibility: higher growth permits higher spending without worsening debt sustainability.
The Centre’s debt-to-GDP ratio is projected to fall gradually to 56.1% in FY26 and 55.6% in FY27, consistent with the medium-term goal of reaching 50% by FY31.
Why the Bond Market Is Under Stress
While the fiscal trajectory looks credible, the near-term borrowing programme faces demand-side challenges. The bond market has already struggled to absorb the ₹14.82 lakh crore of gross borrowing in FY26.
Scheduled commercial banks — the largest holders of G-secs with a 37.5% share — have limited appetite due to a historically high credit-deposit ratio of 82%, which prioritises lending over bond investments.
Insurance companies, which hold around 26% of outstanding government securities, have also reduced purchases after guaranteed-return products lost tax advantages. Mutual funds and pension funds face competition from equity markets, while foreign bond flows have turned volatile.
The RBI’s Growing Role in Market Support
With traditional buyers stepping back, the burden of stabilising the bond market has increasingly fallen on the Reserve Bank of India. Through open market operations (OMOs), the RBI is estimated to have purchased ₹4.35 lakh crore worth of government bonds between April 2025 and January 2026, compared to banks’ net purchases of just ₹86,800 crore, according to Nomura Research.
This intervention has helped contain volatility but raises questions about sustainability if borrowing pressures persist.
Rising Yields and External Flows
The strain is reflected in yields. The benchmark 10-year G-sec yield has climbed close to 6.7%, rising over 50 basis points since May 2025. During the pandemic borrowing surge between 2020 and 2022, yields had touched 7.4%.
Subsequent inclusion of Indian government bonds in global indices such as the JP Morgan Global EM Bond Index and Bloomberg EM local currency indices helped cool yields to around 6.2% by attracting foreign portfolio inflows. However, these inflows have now plateaued, with net outflows of $1.6 billion recorded in December 2025.
What Can Ease the Pressure?
With banks unlikely to significantly raise G-sec purchases, the RBI may need to conduct additional OMOs worth at least ₹2.5 lakh crore in FY27. It may also consider bond-switch operations to spread out redemption pressures, though weak demand for long-dated paper complicates this strategy.
The Budget’s proposal to remove the 50% cap on provident fund investments in government securities could modestly improve demand. A more substantial boost could come from expediting India’s inclusion in the Bloomberg Global Aggregate Index, which tracks nearly $3 trillion in passive assets. Even a 1% allocation could attract inflows of around $30 billion.
Reinstating favourable tax treatment for debt investments could also revive demand from insurance companies and mutual funds, strengthening domestic absorption capacity.
What to Note for Prelims?
- FY27 gross market borrowing: ₹17.2 lakh crore.
- Centre’s debt-to-GDP target: 50% by FY31.
- Major G-sec holders: banks, insurance companies, mutual funds.
- Role of RBI OMOs in bond market stabilisation.
What to Note for Mains?
- Evaluate debt-to-GDP ratio as a fiscal anchor versus deficit targets.
- Analyse challenges in India’s government borrowing programme.
- Discuss the RBI’s role in managing bond market stress.
- Examine how global bond index inclusion affects capital flows and yields.
India’s fiscal stance in FY27 reflects discipline and credibility, but sustaining it will depend not only on prudent budgeting, but also on deepening bond markets, broadening the investor base and aligning monetary-fiscal coordination. The borrowing challenge is no longer about intent — it is about absorption capacity.
Last Modified: February 3, 2026