Govt's record borrowing plan pushes bond yields to over one-year high

By Bhaskar Dutta and Subhadip Sircar

 

India’s benchmark bond yields climbed to the highest in more than a year after the government unveiled a record debt-sale plan that exceeded analysts’ expectations. 

 

New Delhi will borrow ₹17.2 trillion ($187 billion) in the year starting April 1, Finance Minister Nirmala Sitharaman announced in her budget speech on Sunday. That’s 18 per cent higher than the current year and exceeds the ₹16.5 trillion forecast in a Bloomberg News survey.

 

The 10-year bond yield rose as much as eight basis points to 6.78 per cent, the highest since Jan. 17, 2025. The yield may climb to 7 per cent in the coming weeks, according to Nomura Holdings Inc. and ICICI Securities Primary Dealership Ltd. Shorter-maturity yields also rose. 

 

Rising borrowing costs risk deepening strain on an economy already contending with steep US tariffs, while the central bank has limited scope to cut interest rates further to support growth. Yields have climbed even after the Reserve Bank of India waded into the market to cap them — amid heavy issuance by state governments and fading demand from pension and insurance funds.  

 

The central bank will need to ramp up its bond purchases to support liquidity, and buy debt at regular intervals to provide yield signals, said Alok Sharma, head of treasury at Industrial and Commercial Bank of China in Mumbai. 

 

“Active liquidity management will be required, or the path of least resistance is only upwards for yields,” he said.

 

Sitharaman said the budget deficit will ease to 4.3 per cent of gross domestic product in the fiscal year beginning April 1, from an estimated 4.4 per cent in the current year. While the budget gap has been modestly narrowed, swelling bond redemptions have driven gross borrowing sharply higher.

 

Net borrowing, which strips out redemptions, is estimated to be ₹11.7 trillion in the next fiscal year. That’s slightly higher than the current year’s revised figure of ₹11.3 trillion. Redemptions in the coming fiscal year are pegged at about ₹5.5 trillion, a nearly 70 per cent annual increase.

 

The government also plans to raise a net ₹1.3 trillion through treasury bills in the next fiscal year, compared with no such issuance this year, according to budget documents. Shorter-tenure bonds also sold off, with yields on 2030 note climbing by seven basis points.  

 

The Reserve Bank of India’s foreign-exchange interventions to support the rupee have also tightened liquidity in the banking system, partly weighing on demand for bonds.

 

The monetary authority stepped in on Monday to support the currency through dollar sales in offshore and local markets, according to people familiar with the developments. The rupee rose as much as 0.5 per cent — its biggest gain since Dec. 19 —outperforming all regional peers.

 

To offset the liquidity drain from its persistent dollar sales, the central bank has stepped up debt purchases to inject cash into the banking system. Still, yields are now at higher levels than those seen before last year’s 125 basis points of rate reductions. 

 

Traders’ attention now turns to the RBI’s monetary policy decision on Feb. 6.

 

“The RBI will probably provide as much support as possible through it’s liquidity actions, but given the overall bearishness in bond markets worldwide, I see India’s 10-year yield rising around 20 basis points to 6.95 per cent over the next three months,” said Ashhish Vaidya, head of treasury at DBS Bank in Mumbai.