Bond Market Faces Supply Shock As Budget Disappointed

The government’s 2026–27 Budget delivered tougher arithmetic than markets had priced in, triggering expectations of consolidation in the bond market rather than relief.

The fiscal deficit target was set at 4.3% of GDP for 2026–27, only a marginal improvement from 4.4% in 2025–26 and above market expectations of around 4.2%. The slower pace of consolidation undercut hopes of a cleaner glidepath. Public debt was projected at 55.6% of GDP in 2026–27 against 56.1% in 2025–26, also higher than consensus estimates closer to 55%, signalling that a larger part of the adjustment has been deferred to the final four years to meet the stated 50% plus or minus 1% target by 2030–31.

Borrowing numbers added to the disappointment. Gross market borrowing for 2026–27 was pegged at ₹17.2 trillion, well above expectations of around ₹16.5 trillion. Net dated securities supply was set at ₹11.7 trillion, marginally higher than anticipated, reinforcing concerns over sustained supply pressure.

Macro assumptions were broadly realistic, with nominal GDP growth assumed at 10% and net tax revenue growth at 7.2%. However, the ₹800 billion disinvestment target was seen as optimistic, negative for state finances and supportive of wider state development loan spreads.

With ₹3.86 trillion expected from small savings, ₹2.5 trillion through switches and ₹1.3 trillion via Treasury bills, pressure was expected to persist across the yield curve unless the Reserve Bank of India intervened through large open market purchases in the next financial year.