As the transition to a debt-to-GDP regime begins, this figure for the current fiscal stands at 56.1 percent and is expected to decline further to 55.6 percent in FY27.
The glide path appears to be well on track to achieve the target of a 50 percent debt ratio in 2030.
However, the higher market borrowings (gross) figure of ₹17.2 lakh crore for FY27 could be a bit negative as it has increased by 17.7 per cent over the revised estimates for FY26. The government hopes to raise Rs 3.87 lakh crore through a small savings scheme in FY27. The revised estimate for FY26 is ₹3.72 lakh crore versus ₹3.43 lakh crore planned in the 2025 budget, or 8 per cent higher.
Overall, the budget is neutral to marginally negative in terms of bond market margins.
Different drivers
In recent months, yields on shorter-term commercial papers (CPs) and certificates of deposit (CDs) have risen sharply. The interest rate on three-month CPs rose 104 basis points to 7.25 percent last month, while the interest rate on three-month CDs rose 115 basis points to 7.33 percent over the same period. The interest rate on one-year CPs rose 40 basis points to 7.15 percent last month and the interest rate on one-year CDs rose 42 basis points to 7.14 percent. These are data points from Kotak MF (sourced from Refinitiv, CCIL).
In fact, the yield on three-month CDs is 208 basis points higher than the repo rate, a spread that is the highest in the past five years.
Even the 10-year g-sec rate has risen 11 basis points in the past month.
A combination of higher credit-deposit ratio (above 82 per cent), mismatch between bank and mutual fund maturities (one-year versus few-month funds), FPI outflows, RBI moves on currency interventions are all contributing to the spike, even though the Central Banks are injecting liquidity periodically. The cash in circulation of ₹39.8 lakh crore as of January 15, 2026 is a new all-time high, according to the RBI, contributing to the liquidity crisis in the banking system as well as higher yields on government development loans (SDLs).
These sharp spikes could normalize in the coming months as more liquidity is injected and some of the previously mentioned factors are addressed.
However, for about a month now, this sharp move has led to a change in trajectory from a steepening yield curve back to a situation where short-term rates are higher than longer-term rates.
As such, Budget 2026 is largely neutral from a bond market perspective and may not be the driving force behind this development.
Since short- and medium-term returns are above 7 percent, investors can take advantage of this situation to benefit from investing in these maturities. Investors can consider the money market and select medium-term funds/corporate bonds with five-year or lower maturities.
Published on February 1, 2026
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