Bond market expects net borrowing of Rs 11 trillion in Union Budget 2025

Gross issuance may increase slightly due to large bond maturity, but is likely to stay within the range seen the past few years as the govt focuses keeping a lid on fiscal deficit

The government bonds market expects a continuation of the Centre’s fiscal consolidation path in the upcoming Union Budget to be announced on February 1, with no significant changes expected in debt-related taxation policies, market participants have told Business Standard.

 

They expect the government to net borrow around Rs. 11 trillion through the issuance of bonds. 

 

In the previous Union Budget for the current financial year ending March 2025, the government had proposed that starting October 1, 2024, investors could face a 10 per cent tax deducted at source (TDS) on investments in Central Government Securities and State Development Loans (SDLs). The government planned to borrow Rs. 14 trillion (gross) in the current financial year. 

 

As fiscal consolidation progresses gradually, the net issuance of government securities should continue to decline, said experts. While gross issuance may increase slightly due to a larger number of bonds maturing in FY2026, it is expected to remain within levels seen in recent years. Demand for G-Secs might decrease due to fewer passive inflows. Although foreign demand has been weak at the start of the year, it is expected to improve as US yields decline. 

 

Lower fiscal deficit in sight 

 

Further, the fiscal deficit for FY2025 is expected to be slightly below the target, at 4.8 per cent of GDP, compared to the budget estimate of 4.9 per cent, mainly due to lower-than-expected spending. For FY2026, the government is likely to take a gradual approach to reducing the fiscal deficit, possibly setting a target of 4.5 per cent of GDP, in line with its medium-term plan. 

 

“We expect the fiscal deficit for F2025 to be lower than target at 4.8 per cent of GDP (vs. budget estimate (BE) of 4.9 per cent) mainly due to lower than budgeted expenditure. For F2026, we anticipate the government will favour a gradual pace of fiscal consolidation with the fiscal deficit target to be set at 4.5 per cent of GDP, in line with the medium-term plan. With the path of gradual fiscal consolidation, net issuance of GSecs should continue declining,” says a report by Morgan Stanley. 

 

“Gross issuance may pick up modestly due to the larger amount of bonds maturing in FY26, but should remain within the range of recent years. Demand for G-Secs in FY26 may decline alongside this with fewer passive inflows. Foreign demand has been weak to start the year, but we expect it to improve sequentially when US yields turn lower,” it added. 

 

In the FY22 Union Budget, the Centre outlined a fiscal consolidation path through FY26, aiming to reduce the fiscal deficit to 4.5 per cent of GDP. 

 

“There are not too many expectations from the Budget, it’s just that the government may keep that right path on the fiscal deficit. Taxation for funds or debt investment, those things are probably going to remain unchanged,” said a senior executive at a primary dealership. 

 

With Rs 4.05 trillion worth of government bonds scheduled to mature in the next financial year, the government is expected to conduct more switch and buyback auctions. 

 

“The redemptions will be taken care of with buybacks and switch auctions. The borrowing should be around net Rs 11 trillion,” said the treasury head at a private bank.