Debt Monthly for February 2026

Indian Bond Yields: Post-Budget Outlook for FY27

In FYTD26, Indian bond yields defied expectations, firming up even as monetary policy turned supportive. The 10-year yield climbed by more than 35 bps, despite a cumulative 100 bps cut in the repo rate by the RBI. This divergence was driven less by domestic monetary policy and more by a combination of global and supply-side factors.

Globally, bond yields moved higher, limiting the scope for Indian yields to rally meaningfully. At the same time, higher bond supply from state governments skewed issuance toward longer tenors, putting upward pressure on duration-heavy segments of the curve.

On the demand side, FY26 saw temporary headwinds. Two one-off regulatory changes weighed on investor appetite for government securities. First, revisions to NPS investment norms allowed a higher allocation to equities, leading to some reallocation away from bonds. Second, the revised Liquidity Coverage Ratio (LCR) guidelines, effective April 2026, reduced banks’ need to hold high-quality liquid assets (HQLA), easing their structural demand for government bonds.

What could change post Budget and into FY27?

Looking ahead, the outlook for bond yields appears more stable.

Fiscal policy is expected to take center stage, but without adding meaningful stress to bond markets. The government’s shift toward a debt-to-GDP anchor, rather than rigid deficit targets, implies a gradual and orderly fiscal consolidation. For FY27, the fiscal deficit is expected to moderate to around 4.2% of GDP, from 4.4% in FY26, allowing room for steady expenditure growth without sharply increasing borrowing needs.

While overall government borrowing (Centre plus states) is likely to edge higher, part of this is likely to be offset by factors such as GST loan maturities, and buybacks. As a result, net supply pressures could remain manageable.

Importantly, demand conditions are also likely to improve. Inclusion in Bloomberg Global Aggregate Bond Index, higher allocations to provident and pension funds, along with changes under the new labour codes, could gradually support demand for long-duration bonds. With most of the FY26 regulatory adjustments now behind us, demand dynamics are likely to normalize through FY27.

Taking these factors together, we expect Indian 10-year yields to remain firm but range-bound. Through FY27, yields are likely to trade in the 6.5%–7.0% range, compared with around 6.6% currently. While global bond markets will continue to influence near-term moves, domestic fundamentals suggest limited upside risk to yields from here, especially in the absence of fiscal slippage.

In an environment marked by near term uncertainty but underpinned by solid fundamentals, flexibility becomes more valuable than bold positioning.

A strategy focused on steady income generation, combined with selective duration exposure when opportunities arise, appears prudent. Dynamic bond fund may be an appropriate fit for an evolving landscape like this.

Source: Reserve Bank of India (RBI), Ministry of Statistics & Program Implementation (MOSPI), Bloomberg

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Above article is authored by Quantum.

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