Short Description: As India’s FY27 Union Budget approaches, bond investors focus on fiscal credibility and borrowing plans, expecting steady yields despite higher gross issuance.
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As India prepares to unveil its Union Budget for FY27, global bond investors are watching with calibrated expectations. Unlike equities, bonds react to deeper fiscal signals—specifically, the government’s commitment to debt-to-GDP consolidation and borrowing arithmetic. With FY26 targets largely met, the focus shifts to sustainability. The market anticipates a modest reduction in the fiscal deficit to around 4.2% of GDP, viewing this as a sign of disciplined, growth-conscious consolidation. This evolving framework, prioritizing a downward trajectory in the debt ratio over rigid annual targets, is strengthening India’s fiscal credibility with international investors.
For bond supply dynamics, the gross borrowing figure often trumps the headline deficit. In FY27, gross borrowing is projected to rise, driven largely by a heavier redemption calendar rather than expansive fresh borrowing. However, net market borrowing is expected to hold steady, which should prevent material supply shocks. Investors will also scrutinize the budget’s stance on state finances, as rising state-level issuance impacts aggregate supply and spreads. Meanwhile, structural reforms affecting institutional demand—like pension fund allocations—will hold more long-term significance than any headline-grabbing tax changes.
Looking ahead, demand conditions appear stabilizing. Foreign inflows have steadied post-inclusion in global bond indices, and domestic institutional investors are consistent buyers. This sets the stage for bond yields to remain range-bound. The Reserve Bank of India is expected to manage liquidity to smooth any volatility. For global portfolio managers, the takeaway is clear: the FY27 Budget is unlikely to disrupt the market. Returns will likely be driven by carry and accrual strategies, rewarding patience in a landscape of credible policy and contained risks.
Short Summary: The upcoming Indian budget is expected to reinforce fiscal discipline, targeting a lower deficit and sustainable debt path. While gross borrowing may increase due to redemptions, net borrowing should remain stable, supporting a steady outlook for bond yields. Investors will monitor state finances and structural reforms, with range-bound yields favoring carry-oriented strategies.
(The author Sneha Pandey, Fund Manager- Equity, Quantum AMC)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
