Budget 2025: Fiscal consolidation efforts may pull govt bond yields down

Despite higher gross borrowing numbers for financial year 2026 (FY26), the Centre’s fiscal consolidation efforts announced in the Union Budget could push the government bond yields downward, market participants said.

 

The government aims to narrow the fiscal deficit to 4.4 per cent of gross domestic product (GDP) for FY26, down from a revised 4.8 per cent for the current financial year.

 

The government increased gross borrowing to Rs 14.82 trillion from the market to fund the deficit, compared to Rs 14.01 trillion in the current financial year which is expected to limit bond gains.

 

The net market borrowing stands at Rs 11.54 trillion, marginally lower from Rs 11.63 trillion in the current financial year.

 

“The borrowing number was slightly higher, but they have maintained the fiscal consolidation path. The market is expected to open 2-3 basis points lower on Monday,” said the treasury head at a private bank. The yield on the 10-year benchmark bond had settled at 6.69 per cent on Friday.

 

Market now eyes the Reserve Bank of India’s Monetary Policy Committee meeting outcome on Friday for further cues.  Also Read: Budget 2025: ME-Card announced for credit access to MSMEs; key features

 

“The budget was largely on the expected lines, which will lead to a movement of 2-3 basis points in yields. MPC will lead to significant movements,” said a dealer at a primary dealership.

 

Market participants said that traders are broadly expecting the domestic rate-setting panel to cut the repo rate by 25 basis points and herald a softer interest rate regime, which will further soften the benchmark yield to 6.60 per cent. The policy repo rate was reduced in May 2020 last, during the Covid-19 pandemic.

 

“The liquidity measure led to a rise in expectation of a rate cut of at least 25 basis points. The yield will fall to 6.60 per cent if rate cut happens, and if they announce further liquidity measures then the market will cheer with further softening,” said the treasury head at a private bank.

 

The Centre’ budget deficit has steadily narrowed from a peak of over 9 per cent in 2020-21.

 

“The fiscal wizardry of the numbers has been the ability to cut fiscal deficit from 4.8 per cent of GDP in FY25 to 4.4 per cent of GDP in FY26, while simultaneously announcing income tax concessions and retaining a decent public investment outlay,” said Aurodeep Nandi, India Economist, Nomura.

 

“Much of this has been possible on the back of a bonanza of RBI dividends and expectations of healthy income tax collections. Overall, the budget is in line with our expectations, and the fiscal prudence keeps India’s fiscal risk premia low. It should provide greater legroom to the RBI to begin lowering its policy rate at the February MPC,” Aurodeep added.

 

RBI’s six-member rate setting panel will announce the review of the policy on Friday, 7 February.