Government Bond Yields Surge to Over One-Year High Amid Borrowing Concerns
Government bond yields hardened significantly on Monday, with the benchmark 10-year paper closing at a more than one-year high. This surge was driven by a larger-than-expected borrowing programme that weighed heavily on market demand ahead of the upcoming policy meeting. Concurrently, the rupee posted its best gains since December, providing a contrasting dynamic in the financial markets.
Sharp Rise in Benchmark Yields
The benchmark 10-year yield settled at approximately 6.77%, marking a sharp increase from the previous session and its highest close since mid-January 2025. On Friday, it had ended near 6.7%, up from about 6.5% three months prior. Bond markets remained closed on Sunday, contributing to the heightened volatility observed on Monday.
Rupee's Strong Performance
In a positive turn, the rupee rose by about 47 paise to close at 91.51 against the dollar. This movement represents the currency's strongest single-day gain in over a month. The appreciation followed likely dollar sales and modest inflows, which helped offset global volatility. On Friday, the rupee had touched an all-time intraday low of 91.99 before ending at 91.98, highlighting the recent fluctuations.
Factors Driving Yield Increases
Yields have climbed nearly 18 basis points so far this year, primarily driven by expectations of higher bond supply from both the Centre and state governments. Concerns intensified significantly after the Budget announcement, which revealed a record gross market borrowing of Rs 17.2 lakh crore for 2026–27. This figure is nearly Rs 1 lakh crore above market expectations, putting additional pressure on bond prices.
Pranjul Bhandari, an economist with HSBC, commented on the situation, stating, "Net market borrowing came in as expected at Rs 11.7 lakh crore, but gross market borrowing was higher at Rs 17.2 lakh crore. It's possible that the RBI switches or government buybacks could reduce some of the pressure, but that remains only a hope for now." According to Bhandari, while the government met its FY26 fiscal deficit target of 4.4% of GDP, it has opted for a gentler consolidation path of 4.3% for FY27, marking the smallest consolidation in six years.
Budget Implications and Market Adjustments
The Budget also pointed to a slower pace of fiscal consolidation, targeting a debt-to-GDP ratio of 55.6% and a fiscal deficit of 4.3% of GDP for the upcoming year. In response, bond market participants have trimmed their longer-duration exposure post-Budget and shifted towards 1–3 year maturities. This strategic move is based on expectations that liquidity support will help cap short-end yields.
Bond purchases in the secondary market and scheduled buying operations have offered some relief to the markets. However, participants are eagerly awaiting further measures and anticipate that policy rates will remain unchanged in the near term. The interplay between borrowing pressures and monetary policy continues to shape market sentiment, with investors closely monitoring developments for future direction.
