Govt's FY27 borrowing plan pushes up yields higher; rupee gains

Government bond yields surged on Monday after the Union Budget announced higher-than-expected gross borrowing of Rs 17.2 trillion for the financial year 2026–27. The rupee, on the other hand, gained around half a per cent, supported by dollar sales by state-owned banks on behalf of the Reserve Bank of India, dealers said.

 

The higher-than-expected borrowing could mean weekly gross supply at Rs 37,000 crore, up from Rs 31,000 crore, assuming 47 auctions during the year, Nomura said in a report.

 

The yield on the benchmark 10-year government bond rose by seven basis points to settle at 6.77 per cent, the highest in over one year.

 

 

“The high supply is coming at a time when the bond market is already suffering from oversupply,” the report said, while noting the risk of the 10-year bond yield heading towards 7 per cent.

 

On borrowing by states, Nomura said: “We have pencilled in Rs 12.75 trillion of gross supply from the states in FY27. However, we believe risks are towards a higher number, given the Centre’s slower-than-expected consolidation; states are also likely to be more relaxed.”

 

Market expectations were Rs 16 trillion–Rs 16.5 trillion for the financial year 2026–27. The government had gross borrowed Rs 14.8 trillion in FY26.

 

“The market assumed that if the government borrowed about Rs 1 trillion through T-bills, it could reduce gross borrowing by the same amount. Accordingly, gross borrowing of around Rs 16.5 trillion was expected. While the government did borrow via T-bills, it still kept gross borrowing elevated. This unsettled the market, which is why we saw selling pressure. Selling was seen across papers,” said a dealer at a private bank.

 

The government plans to borrow Rs 1.3 trillion via the issuance of Treasury bills.

 

The rupee reversed early losses on Monday to post its biggest single-day gain in nearly two months, since December 19, 2025, supported by dollar sales by the Reserve Bank of India. Dealers said the central bank intervened to contain volatility following the Union Budget. The local currency settled at 91.52 per dollar, against the previous close of 91.99 per dollar.

 

Market participants said that the RBI conducted mid-tenor buy/sell swaps to prevent spillover into the foreign exchange market.

 

“Government borrowing for the year announced at a record high, bond yields moved higher. However, the RBI’s swap operations helped cushion rupee liquidity and prevented spillover stress into the foreign exchange market,” said Abhishek Goenka, founder and CEO of IFA Global. “While underlying global and domestic pressures persist, the RBI’s intervention ensured an orderly adjustment, anchoring near-term rupee sentiment even as fixed-income markets digested the Budget’s borrowing signals,” he added.

 

Bond market participants said that even with soft inflation and an easing bias on interest rates, the massive supply is expected to keep yields elevated, with the 10-year benchmark likely to trade in the range of 6.60 per cent to 7 per cent, with limited scope for meaningful declines without explicit central bank support.

 

Government securities worth about Rs 5.5 trillion are scheduled to mature in FY27. The RBI is estimated to hold around Rs 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.

 

Traders now eye the outcome of the upcoming Monetary Policy Committee meeting on Friday for significant cues.