Bond markets have seen some volatility in the recent period, with the yields on the 10-year G-sec creeping up by nearly 13 bps in the last two months, from an average of 6.52% in November 2025 to 6.65% in January 2026.This uptick is despite continued monetary easing and liquidity support in the form of CRR cuts, swaps and open market operations (OMO), and is likely to have been driven by fiscal concerns, including those around the absorption of the supply in FY2027, which will be announced in the upcoming budgets of the Government of India and the states.
Firstly, on the FY2026 budget math, while a large miss on the tax collections front is imminent, this would be partly offset by higher-than-budgeted non-tax collections. Besides, the Government of India’s (GoI) non-interest non-subsidy revex needs to grow by an elevated 30% in the last four months of the fiscal to meet the FY2026 Budget Estimate (BE), which is unlikely to materialise, leaving room for expenditure savings. Consequently, we do not expect a material fiscal slippage in FY2026, suggesting that the GoI will stick to its market borrowing plan in the remainder of the fiscal.
Thereafter, we expect the GoI to pencil in a modest consolidation in FY2027, capping the fiscal deficit at 4.3% of GDP vs. 4.4% in FY2026, taking into account the shift in the fiscal anchor to the debt-to-GDP ratio.Based on our calculations, this would imply a net market borrowing number of Rs. 12.2 trillion, slightly higher than the FY2026 levels. Even after adjusting for repayments from the GST compensation fund, redemptions are expected to surgeto Rs. 4.6 trillion from Rs 3.3 trillion in the ongoing fiscal. This would push up the gross market borrowing number quite sharply to Rs. 16.9 trillion from Rs. 14.6 trillion in FY2026.
Adding the projected gross issuance of state government securities to this, would take the total gross issuances close to Rs. 30 trillion in FY2027 from ~Rs. 27 trillion in FY2026. This is concerning, given that a part of the FY2026 borrowings have been supported by OMO purchases to the tune of Rs. 6.2 trillion so far (till January 30, 2026).
However, the GoI has some levers to bring down its gross issuance number for FY2027 to more palatable levels.
For instance, the cumulative inflows under savings deposit and certificates and PPF have surged by ~32%year-on-year (YoY) in 9M FY2026, amid unchanged interest rates for small savings schemes.Consequently, even if such inflows remain flat during Q4 FY2026compared to the year-ago levels, this will imply an overshooting to the tune of ~Rs. 0.9 trillion over the budgeted target. This would likely boost the GoI’s cash balances, that can be carried into FY2027 and drawn down to reduce market borrowings.Alternatively, this could be used to conduct buyback of G-secs to reduce redemption pressure in the next fiscal.
Besides, the GoI could limit the expansion in dated borrowings by resorting to net T-bill issuances, which were pegged at nil for FY2026 as per the BE and were negative in FY2025. Even a modest amount net issuance of T-bills in FY2027, to the tune of Rs. 0.5 trillion, would help curtail dated issuances.
Finally, the GoI could pencil in switches/conversions for some G-secsthat are due to mature in FY2027, to bring down the redemption number for the fiscal. Gross switching was budgeted at Rs. 2.5 trillion in FY2026, of which ~Rs. 1.6 trillion has been done in the fiscal so far, implying that Rs. 0.9 trillion is left to be conducted in the remainder of Q4 FY2026. Some of this available space could be used for securities maturing in the next fiscal.
A combination of these tools could be used to bring down the GoI’s gross issuances to ~Rs. 15.5-16.0 trillion. These levels would aid in containing the uptick in G-sec yields in the next few months.
- Aditi Nayar is chief economist, head- research & outreach at ICRA