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India’s ambitious fiscal agenda is facing a stern reality check from its own bond market. A recent ₹75,500 crore government bond buyback, intended to ease long-term borrowing costs, provided only fleeting relief. The benchmark 10-year government bond yield quickly rebounded from a post-Budget peak, underscoring how tactical liability management is being overwhelmed by fundamental demand-supply dynamics. The core issue is an unprecedented supply glut: the Centre’s FY27 gross market borrowing is projected at a record ₹17.2 trillion, with state governments adding approximately ₹13 trillion more. This deluge of paper is testing the appetite of domestic institutions, creating a persistent headwind for prices.
Compounding the supply challenge is a cautious monetary policy stance from the Reserve Bank of India (RBI). With the rate-cut cycle seen as over and the repo rate steady at 5.25%, yields lack a catalyst from easing. While inflation in India is projected to remain within the RBI’s target band, geopolitical risks to energy prices loom. Furthermore, the fiscal arithmetic reveals strain, with interest payments consuming nearly 40% of revenue receipts. This burden, alongside a structural shift toward longer-duration debt issuance, is pushing investors to demand higher term premiums. The recent inclusion in global bond indices brings in foreign capital, but analysts question if these flows can absorb the monumental domestic issuance without sustained upward pressure on costs.
Short Summary: India’s bond market signals structural strain as record government borrowing overwhelms investor demand. Despite tactical buybacks and global index inflows, persistent supply, a cautious RBI, and high debt affordability concerns are driving 10-year government bond yields higher. The outlook remains range-bound with clear upside risks, as inflation in India and fiscal discipline remain key watchpoints for global finance observers.
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