Union Budget 2026-27: Govt borrowing challenge passed on to RBI

Budget FY27 signals deeper banking reforms, possible PSB consolidation and higher borrowing, shifting the onus to RBI to manage yields and liquidity

Finance Minister Nirmala Sitharaman’s “futuristic” Budget proposes a high-level banking committee for “Viksit Bharat”. It will review a sector with strong balance sheets, improved asset quality and presence in over 98 per cent of India’s villages, and recommend how to support the next phase of growth while safeguarding financial stability, inclusion and consumer protection. 

In the financial sector, the stated theme is consumer protection. Both the finance ministry and the Reserve Bank of India (RBI) have been sensitising the sector. Beyond this, the committee will probably chart a second round of consolidation in public-sector banking (PSB). 

In 2017, State Bank of India (SBI) merged five associate banks and Bharatiya Mahila Bank into itself. By 2020, mergers among PSBs cut their number from 27 to 12. Most PSBs gained scale through this. A further round could create even larger PSBs and reduce the count again; SBI remains the only Indian bank among the world’s top 50 by assets. 

The committee may also examine raising the foreign ownership limit in PSBs from 20 per cent to 49 per cent. While the government’s minimum stake in PSBs is 51 per cent, it is over 90 per cent in at least three banks. We need to watch how the foreign stake will be raised. Government stake may not be diluted directly, but PSBs could be allowed to raise fresh capital via qualified institutional placements and other instruments. Will corporations be allowed to set up banks? There is no uniform global approach. In 2020, the RBI’s internal working group recommend­ed allowing large Indian corporate houses to promote private banks, subject to checks and balances and amendments to the Banking Regulation Act to address lending and concentration risks. 

For now, this remains blue-sky thinking. Markets may have given the Budget a thumbs down: The Nifty 50 fell 1.96 per cent on Sunday, the Bank Nifty 2 per cent, and the Nifty PSU Bank index 5.6 per cent. Some PSBs fell even more. Bankers have sought equal tax treatment for bank deposits and equity investments, but the Budget did not address it; acceptance could have supported deposit mobilisation amid rising credit demand. 

The government’s FY27 borrowing programme is the bigger concern. The finance minister has stayed on her FY22 path to bring the fiscal deficit below 4.5 per cent of gross domestic product (GDP) by 2026: It is estimated at 4.4 per cent for FY26 and 4.3 per cent for FY27. These numbers are consistent with the fiscal framework that uses debt consolidation as the anchor, with a target debt-to-GDP ratio of 50 per cent (+/- 1 percentage point) by FY31. While this is in line with market expectations, the size of the borrowing programme is not. 

In FY27, net borrowing is estimated at ₹11.7 trillion, against ₹11.54 trillion this year. Another ₹1.3 trillion is to be raised via treasury bills. Gross borrowing is pegged at ₹17.2 trillion versus ₹14.72 trillion this year. The market was not expecting this. Add state development loans, which could rise to ₹13.5 trillion in FY27 from ₹12.5 trillion. 

That is the supply side. What about demand? How will the government manage such a large borrowing programme? Why worry when the RBI is there? In FY26, the RBI has gone for aggressive open-market operations (OMO), buying bonds worth a record ₹6.5 trillion — more than twice it did last year. It seems there is no choice before the RBI but to continue with this next year too. It can also go for a switch — buy back government paper maturing in the near term and issue long-term securities. With credit demand picking up and deposit growth lagging (the banking industry’s year-on-year deposit growth till January 15 was 10.6 per cent; credit growth 13.1 per cent), banks may be reluctant to buy government paper. The 10-year bond yield, which closed at 6.69 per cent on Friday, is set to rise. 

The finance ministry has shifted the managing of the borrowing to the RBI. Between February and December 2025, the RBI cut the policy rate by 1.25 percentage points. There is not much scope for a further cut. Its challenge will be to see the rate does not go up. How will it do it? Let's wait for the policy review later this week. 

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book: Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in.  X: @TamalBandyo