As investors look ahead to the Union Budget for 2026-27, attention is focused on a projected ₹30.5 trillion sovereign bond supply. Market experts estimate gross central government borrowing of about ₹16.5 trillion, alongside a sharp increase in state borrowing to around ₹14 trillion.
“The central government is passing on part of the burden of the employment scheme to state governments. While the Centre is expected to meet its fiscal target, state government will have to go for additional borrowing. So the market, which is buying both central government securities and state government securities, will face supply pressure in the next financial year,” said an economist with a private bank.
Total sovereign bond supply by the end of the current financial year is estimated at ₹27.05 trillion, including state bond issuances of ₹12.45 trillion.
A recent Reserve Bank of India (RBI) report on state finances noted that market borrowings by state governments have expanded significantly over the past two decades. Most major states budgeted higher borrowing for 2025-26. During the first half of 2025-26, states’ market borrowing rose 21.0 per cent year-on-year.
The report noted that increased market borrowings by the state governments, including an elongation of maturity profiles, have impacted the yield structure in the government securities market and the borrowing space available for the central government and the private corporate sector.
“We expect the FY27 fiscal deficit to remain on the glide path of fiscal consolidation and likely to peg at 4.3 per cent, implying a government gross borrowing programme of around ₹16.5 trillion. While net borrowing should stay broadly similar to last year, the gross figure may rise due to higher maturities next year,” said Abhishek Bisen, Head-Fixed Income, Kotak Mahindra AMC.
Government securities worth about ₹5.5 trillion are scheduled to mature in FY27. The RBI is estimated to hold around ₹1 trillion of government securities, creating the possibility of switches into longer-dated bonds to prevent liquidity drain if they mature on the RBI’s books, said market participants. Alternatively, with yields remaining elevated, the government may opt to increase Treasury bill issuances to limit gross market borrowing, they said.
Against this backdrop, experts said structural solutions may prove more effective than incremental adjustments to fiscal deficit targets. “Over the last few years there has been a rising dependence on the RBI to meet the demand-supply gap in the fixed income market. This reflects higher supply pressure from both Gsecs and state government bonds and moderation in domestic savings. Over the next few years, government securities supply is expected to remain on the higher side. It is important that fresh sources of investment demand are developed, both domestic as well as foreign," a report by IDFC First bank said.
A Standard Chartered report said the recommendations of the 16th Finance Commission are likely to be incorporated in the FY27 Budget. The Finance Commission, constituted every five years, determines the sharing of financial resources between the Centre and the states, as well as among states.
“This reallocation is required because states account for 60 per cent of combined government spending but receive 40 per cent of total revenue generated. A significant change in the revenue devolution/expenditure proportion between the central and state governments could impact the FY27 fiscal deficit target. However, we do not expect the combined fiscal deficit to change based on the FC’s current recommendations,” the report said.
Bond market participants said that even with soft inflation and an easing bias on interest rates, the scale of issuance is expected to keep yields elevated, with the 10-year benchmark likely to trade in the 6.60 per cent to 6.70 per cent range, offering limited scope for a sustained decline without explicit support from the RBI.
 "Bond market, Bond Yield")