Higher government borrowing in Budget 2026 could impact G-Secs interest rates and fiscal stability

The Union Budget 2026-27 proposes higher government borrowing of ₹17.2 lakh crore, while net market borrowing is estimated at ₹11.7 lakh crore to finance the fiscal deficit. | Photo credits: /iStockphoto

The Union Budget for FY27 has increased gross market borrowings to ₹17.2 lakh crore (₹14.8 lakh crore in FY26).

Financing budget deficits

The government borrows to finance the budget deficit, which is the excess of total expenditure over total unborrowed receipts.

Net market borrowings from dated securities in FY27 are estimated at ₹11.7 lakh crore (₹11.5 lakh crore in FY26). Balance funding is expected to come from small savings and other sources.

Market reaction

Marzban Irani, president of LIC Mutual Fund, noted that gross market loans, which crossed the ₹17 lakh crore mark, are on the higher side. In response to higher borrowing, he expects the yield on the 10-year benchmark G-Sec (6.48 percent in 2035), which closed at 6.70 percent on January 30 (Friday), to harden when the debt market opens for trading on Monday.

Irani emphasized that the government’s approach to raising resources appears to be balanced with conservative assumptions for mobilizing small savings. Overall, the budget maintains stability while taking into account emerging fiscal pressures, he added.

Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, opined that the Union Budget balances short-term fiscal management with structural reforms aimed at deepening Indian bond markets at a time when the government’s borrowing needs remain high.

Borrow drivers

“On the fiscal front, gross market borrowings for FY27 are higher than last year, largely driven by repayments and refinancing needs. However, net market borrowings remain largely in check, indicating that the increase in gross issuance is not translating into a proportionate increase in new financing.

Impact on the bond market

“For the bond market, this distinction is important: while higher gross supply can influence auction dynamics and term premiums, a stable net borrowing deficit strengthens the government’s commitment to fiscal consolidation.”

Dependence on small savings

Venkatakrishnan said the government may continue to rely on small savings schemes with attractive interest rates compared to bank deposits to help manage the fiscal deficit.

A cautious budgetary process

While no changes have been announced in the small savings framework or interest rates, continued mobilization through these schemes will help moderate dependence on market borrowing and limit pressure on the G-sec market, he added.

Focus on debt to GDP

Murthy Nagarajan, Head-Fixed Income, Tata Asset Management, noted that the government is targeting a fiscal deficit of 4.3 percent of GDP in FY27, up from 4.4 percent in FY26. Further, the government has shifted targets from reducing the fiscal deficit to the debt-to-GDP ratio (55.6 percent of GDP in FY27, up from the revised FY26 estimate of 56.1 percent).

He noted that the government has taken a cautious course as reducing the fiscal deficit could lead to a slowdown in a global environment that is not conducive to growth. It is once again doing the heavy lifting, increasing capital expenditure from Rs 11 lakh crore to ₹12.20 lakh crore for the next financial year.

Debt market prospects

“The debt market expected net and gross borrowings of ₹11.5 lakh crore and ₹17 lakh crore respectively, assuming a fiscal deficit of 4.2 per cent. The debt market could open slightly negative on the back of a higher borrowing programme,” Murthy said.

Published on February 1, 2026