India’s Bond Market Wobbles as Record Borrowing Pushes Yields Higher

The yield on the benchmark 6.48% 2035 bond jumped 8 basis points to 6.78% on Monday. That move capped a steady climb in recent weeks and underscored how sensitive the debt market is to supply shocks. The trigger this time was clear: the government plans to borrow a gross ₹17.2 trillion in the next fiscal year starting 1 April 2026. That is the highest borrowing programme on record.

Finance Minister Nirmala Sitharaman presented the numbers in the budget under the government led by Prime Minister Narendra Modi. While the fiscal deficit target shows a marginal improvement (projected at 4.3% of GDP next year vs 4.4% this year), the gross issuance number stole the spotlight in bond trading rooms.

Why Does The 10-Year Yield Matter So Much?

The 10-year government bond yield acts as the reference point for the broader yield curve. Corporate borrowing costs, state government bond pricing and parts of the banking system’s lending benchmarks all take cues from it.

When this yield rises, financing becomes more expensive across the system. Yields and prices move in opposite directions. So when yields spike, existing bondholders see mark-to-market losses. Banks, insurers and mutual funds feel that impact directly on their portfolios. At the same time, the government faces higher interest costs on fresh borrowing, which can strain future budgets.

What makes the latest move notable is the backdrop. Yields have climbed even after earlier policy rate cuts and significant debt purchases by the central bank. That tells you supply-demand dynamics are now overpowering policy easing.

Why Are Investors Struggling To Absorb The Supply?

Market participants are already nursing trading losses after the recent rise in yields. Risk-taking has naturally become more cautious. Add to that heavy issuance from state governments, and the market is being asked to digest large volumes of bonds from multiple sources at once.

Liquidity conditions have also not been especially comfortable. Foreign-exchange interventions by the Reserve Bank of India, which involve selling dollars, have drained some rupee liquidity from the banking system. Tighter liquidity typically reduces banks’ capacity to add bonds aggressively to their portfolios.

Technically, net borrowing for next year is estimated at ₹11.7 trillion, only slightly higher than this year’s ₹11.5 trillion. But traders rarely stop at net numbers. Gross supply determines how much bond stock actually hits the market through auctions. That is what shapes near-term price action.

Will The Central Bank Step In More Aggressively?

The RBI has been using Open Market Operations (OPOs) to buy bonds and inject liquidity. But with borrowing set to rise and yields already elevated, investors are wondering whether those operations will be scaled up further.

Nathan Sribalasundaram, Asia rates strategist at Nomura, said his team remains cautious on bonds despite recent cheapening. He does not advocate long positions and sees the 10-year yield potentially moving closer to 7% in the near term. The RBI, he noted, remains the marginal buyer, and the bar for additional bond purchases appears low.

Dhiraj Nim of ANZ expects the central bank to rely on OMOs to manage both liquidity and borrowing costs as macro conditions dampen private sector demand for bonds.

The RBI’s policy review later this week adds another layer of anticipation. A rate cut is not widely expected. Liquidity signals, however, could move markets.

What Does This Mean For The Broader Economy?

Higher yields quietly tighten financial conditions. Government borrowing becomes more expensive. Companies may think twice before raising debt for expansion. States, too, face steeper costs. Even banks must manage the valuation swings in their bond portfolios.

All this comes as policymakers try to balance growth support with fiscal discipline and external pressures. With limited room for aggressive rate cuts, liquidity tools and bond purchases could become the main levers to steady markets.

Sources:

The Print

Economic Times