According to The Hindu BusinessLine, Budget 2026 maintains the trend of steadily reducing fiscal deficit, with the figure for FY26 indicated at 4.4 per cent. This is further expected to fall to 4.3 per cent in FY27. As the transition to a debt-to-GDP regime begins, the figure stands at 56.1 per cent for the current fiscal and is expected to decrease further to 55.6 per cent in FY27. The glide path appears well on course to achieving the target of 50 per cent debt-to-GDP figure by 2030. Latest reports from Moneycontrol indicate that the government's FY27 fiscal deficit target of 4.3% of GDP and elevated capex allocation reinforce policy credibility, though higher gross borrowings will test market appetite in the near term.
The government has pegged gross market borrowing for FY27 at a record ₹17.20 lakh crore, higher than many in the market had pencilled in. Net borrowing is seen at ₹11.73 lakh crore. While the fiscal deficit is projected at 4.3 per cent of GDP and the Centre has shifted to a debt-to-GDP target of 55.6 per cent, traders worry about supply-demand imbalances in government securities. The 10-year benchmark yield has already been inching up in recent weeks, even after the RBI cut the repo rate by 125 basis points since 2025. Finance Minister Nirmala Sitharaman acknowledged market concerns, stating "We are very conscious that yields are going up again... It is dependent on so many different factors."
According to The Hindu BusinessLine, bond yields on shorter tenor commercial papers (CPs) and certificates of deposits (CDs) have risen sharply in recent months. Three-month CP yield is up 104 basis points in just the last month to 7.25 per cent, while three-month CD yields are up 115 basis points over the same period to 7.33 per cent. One-year CP yields are up 40 basis points over the past month to 7.15 per cent, and one-year CD yields are higher by 42 basis points to 7.14 per cent. The disconnect between policy rate cuts and elevated long-term yields has kept borrowing costs sticky for both the Centre and states. Latest analysis suggests that the 3-month CD yield is higher than the repo rate by 208 basis points, a spread that is highest in the past five years.
The rupee has been on a weak footing, losing nearly 10 per cent against the dollar over the past year and hovering near record lows. Asked about currency trajectory, Sitharaman said, "our party was, and is, in favour of always a strong rupee, no doubt. But it's also got to be predicated in the context of how the economy is." Vivek Kumar of QuantEco Research expects the RBI to remain active in the FX market, noting that OMO purchases are already linked to dollar sale activity. Kumar anticipates the central bank could extend OMOs to state development loans or revive "Operation Twist" to manage the yield curve more effectively. The combination of higher credit-deposit ratio (over 82 per cent), tenor mismatch between banks and mutual funds, FPI outflows, RBI moves on forex interventions, and higher yields on State development loans are contributing to the spike.
The 3-month CD yield is higher than the repo rate by 208 basis points, a spread that is highest in the past five years. Cash in circulation of ₹39.8 lakh crore as of January 15, 2026, is a new all-time high according to the RBI, adding to the liquidity crunch on the banking system. For now, the RBI faces a delicate balancing act between ensuring heavy government borrowing doesn't crowd out private investment while managing currency volatility. The combination of higher credit-deposit ratio (over 82 per cent), tenor mismatch between banks and mutual funds, FPI outflows, RBI moves on forex interventions, and higher yields on State development loans are contributing to the spike in bond yields.
Since short and medium term yields are north of 7 per cent, this situation can be used by investors to benefit from investing in these tenors. Investors can consider money market and select medium duration/corporate bond funds in the five-year or lower tenors. The sharp spikes may normalize in coming months as more liquidity is infused and factors contributing to the current situation are addressed. Vivek Iyer of Grant Thornton Bharat noted that while intervention may be necessary, market forces must reflect underlying fiscal realities, especially at the sub-national level where heavy issuance of SDLs has added to supply pressures. Latest reports suggest that the government's FY27 fiscal deficit target of 4.3% of GDP and elevated capex allocation reinforce policy credibility, though higher gross borrowings will test market appetite in the near term.