Budget 2026-27: Gsec yields may harden on higher FY27 borrowing

Rupee likely to come under pressure due to foreign outflows

Government bond (G-Sec) yields are expected to open 4 basis points (bps) to 5 bps higher on Monday as the Union Budget announced a larger-than-expected gross market borrowing via dated securities of ₹17.2 trillion for 2026-27 (FY27), banks’ treasury officials said. The market was expecting ₹16 trillion to ₹16.5 trillion. The government had gross borrowed ₹14.8 trillion in FY26.

 

The yield on the benchmark 10-year government bond settled at 6.70 per cent on Friday.

 

“Gross market borrowings are closer to Nomura views, but higher than market expectations, and will mean continued market concerns around large Centre and state bond supply next year,” said Sonal Varma, managing director and chief economist (India and Asia ex-Japan), Nomura. 

Additionally, the government plans to borrow ₹1.3 trillion via issuance of treasury bills.

 

The rupee is also seen opening weaker on the back of foreign outflows from domestic equities. Benchmark indices fell almost 2 per cent on Sunday after securities transaction tax (STT) rates for futures and options (F&O) were raised.

 

Market participants said that the Reserve Bank of India (RBI) is expected to intervene in the rupee forwards market ahead of the trading hours, followed with spot intervention in order to curb excess volatility. It had settled at 91.99 per dollar on Friday.

 

Banking stocks fell on Sunday as rise in bond yields could impact treasury gains. State Bank of India’s (SBI’s) stock declined 5.3 per cent. HDFC Bank fell 1.2 per cent and ICICI Bank dipped 1.5 per cent. The Nifty PSU Bank index declined by 5.6 per cent, and the Nifty Bank index fell by 2 per cent.

 

Additionally, the government has proposed an extra incentive of ₹100 crore for a single issuance exceeding ₹1,000 crore by a civic body to deepen the municipal bond market. The Budget also announced the introduction of a market-making framework and total return swaps for corporate bonds.

 

As of December 31, 2025, total municipal bonds outstanding amounted to ₹3,783.9 crore, with ₹1,000 crore worth of bonds issued in calendar year 2025 (CY25).

 

“Small policy moves for the bond market like the market-making framework will enhance liquidity in the secondary market, and introduction of bond indices will bring in more transparency for pricing and hedging credit risk. Big boost for municipal bond issuance with incentive for issuance raised to ₹100 crore,” said Vishal Goenka, cofounder, IndiaBonds.