For the financial sector, the theme now is consumer protection. Both the finance ministry and the banking regulator have been sensitising the sector on its importance. Beyond this, the committee will probably chart the course of a second round of consolidation in India’s public-sector banking (PSB) industry.
In 2017, State Bank of India (SBI) merged five associate banks and Bharatiya Mahila Bank with itself. By 2020, a wider round of mergers among PSBs followed, reducing their number from 27 to 12. Most PSBs gained scale through this. The next step is expected to be a further consolidation round — creating even larger PSBs and reducing the overall count. At present, SBI is the only Indian bank among the world’s top 50 by assets.
The committee may also examine whether to raise 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. The government may not dilute its holding directly, but PSBs could be allowed to raise fresh capital through qualified institutional placements and other instruments.
Will corporations be allowed to set up banks? There is no uniform global approach. In 2020, an internal working group of the Reserve Bank of India (RBI) recommended allowing large Indian corporate houses to promote private banks, subject to checks and balances and amendments to the Banking Regulation Act to address connected lending and concentration risks.
For now, this remains blue-sky thinking. Markets, however, appear to have given the Budget a thumbs down. The Nifty 50 fell 1.96 per cent on Sunday, the Bank Nifty dropped 2 per cent, and the Nifty PSU Bank index slid 5.6 per cent. Some PSBs fell even more.
Bankers have been seeking equal tax treatment for bank deposits and equity investments, but the Budget did not address it. Had it been accepted, their deposits would have got a boost amid a rising demand for credit.
The government’s FY27 borrowing programme is a bigger concern. Indeed, the finance minister has stayed on course with her FY22 commitment to bring the fiscal deficit below 4.5 per cent of gross domestic product (GDP) by 2026. The deficit is now estimated at 4.4 per cent for FY26, and 4.3 per cent for FY27. These numbers are consistent with the new fiscal framework that uses debt consolidation as the anchor, with a target debt-to-GDP ratio of 50 per cent (plus or minus 1 percentage point) by FY31.
While this is in line with market expectations, the size of the government borrowing programme is not.
In FY27, the government’s net borrowing programme is estimated at ₹11.7 trillion, marginally higher than ₹11.54 trillion this year. Another ₹1.3 trillion will be raised through treasury bills. And the gross borrowing programme is projected to be ₹17.2 trillion, against this year’s ₹14.72 trillion. The market was not expecting this. Add to this the state development loans. Compared with this year’s ₹12.5 trillion, it could go up to ₹13.5 trillion in FY27.
This is the supply-side story. 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 managed it well with aggressive open-market operations (OMO), buying a record ₹6.5 trillion worth of bonds — more than twice as much as 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, and credit growth 13.1 per cent — banks will not be excited 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 clearly shifted the burden of seeing through the government borrowing programme to the RBI. Between February and December 2025, the RBI cut the policy rate by 1.25 percentage points to 5.25 per cent. There is not much scope for a further rate cut. Its challenge will be to see that the market rate does not go up. How will it do it? Let's wait for the monetary policy 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.
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