India’s G-Sec Yields Hit Near 1-Year High Following Budget 2026: Key Drivers Explained

India’s government bond (G-sec) yields rose on February 2 after Union Finance Minister Nirmala Sitharaman announced that the Centre will raise Rs 17.2 lakh crore through dated securities in the financial year 2026-27. The borrowing amount pegged by the government is higher than market expectations, which has led to a rise in bond yields.

Centre’s Rs 17.2 lakh crore estimated borrowings for FY27 are nearly 18 per cent higher than the revised borrowing amount for the ongoing financial year. Market experts had expected the Centre would borrow around Rs 16 lakh crore in FY27. The higher than expected amount is likely to deter appetite for bonds, which in turn is expected to further raise bond yields.

The 10-year benchmark G-sec yield rose 6.77 per cent, the highest yield seen since March 6, 2025. Bond yields have already been rising due to waning demand for bonds amid a higher supply of state government bonds and an overall muted demand from pension and insurance funds.

The supply-side pressure adds to the odds of borrowing costs rising further, as banks grapple with the lag in deposit growth. Moreover, market participants also expect a higher state bond supply in the upcoming year, which is also expected to put pressure on bond yields.

The bumper bond supply comes on the back of higher bond redemptions in the coming year, along with the government's focus on increasing capital expenditure to boost domestic industries amid turmoil in the global markets due to higher tariffs and uncertainties around trade. Total redemptions for the central government in FY27 are estimated to be around Rs. 5.5 lakh crore, which is almost 70 per cent higher than the current year.

This also led the government to project a narrower fiscal deficit target at 4.3 per cent of the country’s gross domestic product (GDP) for FY27. Market participants were expecting the fiscal deficit target at around 4.2 per cent, against 4.4 per cent for FY26.

“Although fiscal prudence is demonstrated with 4.4 per cent fiscal deficit achieved for FY26 and 4.3 per cent projection for FY27, the larger-than-expected gross borrowing plan of Rs. 17.2 lakh crores may have the market worried in spite of the net borrowing number of Rs. 11.7 lakh crores being in line. All eyes now on RBI policy later in the week to address bond market concerns,” Vishal Goenka, co-founder of online bond platform IndiaBonds.com, said.

Market participants also see a limited scope of further rate cuts by the Reserve Bank of India, with 125 basis points of rate cuts already delivered. Some expect the RBI’s Monetary Policy Committee to cut the benchmark repo rate by another 25 bps at the upcoming policy meeting, the decision for which will be announced on February 6. However, most either expect the rate cuts by the RBI to be already over and a status quo on rates, or believe this will be the last cut in the current easing cycle.

All these factors, coupled with muted buys from foreign portfolio investors, market participants and experts see the 10-year bond yield could rise to 7 per cent in the coming weeks. The only way to limit the rise in bond yields now is through more liquidity support from RBI though bond purchases, through open market operations (OMO).

“...The bond market in the near term will continue to depend on the RBI’s open market operations to anchor yields. This remains a challenge and could keep yields elevated relative to underlying macroeconomic numbers,” Rajeev Radhakrishnan, chief investment officer - fixed income, at SBI Mutual Fund, said.