India’s Union Budget 2026–27, presented by Finance Minister Nirmala Sitharaman on 1 February 2026, outlines a continued commitment to fiscal consolidation while sustaining growth through capital expenditure. The fiscal deficit for FY27 has been set at 4.3% of GDP, marginally lower than the revised estimate of 4.4% for FY26, keeping the government on track with its medium-term consolidation glide path.
For FY27, the Centre’s debt is estimated at 55.6% of GDP. Gross market borrowings are budgeted at Rs 17.2 lakh crore, with net borrowings at Rs 11.7 lakh crore. The elevated borrowing programme comes at a time when bond yields are already firm, largely due to supply-side pressures and global rate dynamics.
Fiscal Deficit Target
The fiscal deficit target of 4.3% of GDP for FY27 aligns with the government’s commitment, first articulated in the Union Budget 2021–22, to bring the deficit below 4.5% by FY26. The FY27 estimate is based on an assumed nominal GDP growth of around 10%, supported by real GDP growth of approximately 7.4% and a stable inflation environment.
Revenue receipts for FY27 are estimated at Rs 35.33 lakh crore. Gross tax revenues are projected at Rs 44.04 lakh crore, reflecting an increase of about 8% over the revised estimates for FY26. Of this, direct taxes are expected to contribute approximately Rs 26.97 lakh crore.
Total expenditure for FY27 is estimated at Rs 53.47 lakh crore, equivalent to 13.6% of GDP, marking a 7.7% increase over the revised estimates of FY26. Capital expenditure remains a priority, with capital outlay budgeted at Rs 12.22 lakh crore (3.1% of GDP). When grants for asset creation to states are included, effective capital expenditure rises to Rs 17.15 lakh crore, or 4.4% of GDP.
Tax devolution to states, based on the Sixteenth Finance Commission’s framework, is estimated at Rs 15.26 lakh crore, representing 41% of the divisible pool. While this supports state-level spending and investment, economists note that any shortfall in tax revenues could necessitate expenditure rationalisation to maintain the fiscal glide path.
Government Borrowing Programme
The government’s gross borrowing programme for FY27 stands at Rs 17.2 lakh crore, higher than the previous year, largely due to refinancing requirements and continued funding of capital expenditure. Net market borrowings are estimated at Rs 11.7 lakh crore.
Borrowings will be undertaken through the issuance of dated government securities and Sovereign Green Bonds across maturities ranging from short- to long-tenor instruments, in accordance with the Reserve Bank of India’s debt management framework.
The elevated supply of government securities increases the burden on the bond market’s absorption capacity, particularly when combined with sizable state government borrowing programmes. This raises the likelihood of active liquidity and market management measures by the RBI to ensure orderly conditions and contain volatility in borrowing costs.
Non-tax revenues, including dividends and surplus transfers from public sector entities and the RBI, along with disinvestment proceeds, remain important supplementary funding sources. These inflows provide additional fiscal flexibility and support the government’s medium-term debt objective of gradually reducing the debt-to-GDP ratio towards the targeted band over the coming years.
The FY27 fiscal framework, with a deficit of 4.3% of GDP and a clear consolidation roadmap, provides an element of credibility to India’s macroeconomic stance. However, the large gross borrowing requirement is a key factor influencing bond yield dynamics.
Capital expenditure remains elevated, supporting medium-term growth prospects, but also contributing to near-term supply pressures in the bond market. Increased tax devolution to states further amplifies overall public sector borrowing requirements.
Factor
Impact on Yields
FY27 Assessment
Gross Borrowing
Higher supply adds upward pressure
Absorption remains key
Fiscal Deficit
Gradual consolidation supports credibility
Demand supportive
RBI Operations
OMOs and liquidity tools may moderate volatility
Partial offset
State Borrowings
Elevated issuance adds to supply
Upside risk to yields
Market participants will closely track the RBI’s liquidity management, auction outcomes, and the pace of state borrowings to assess yield stability through the year.
Market and Economic Implications
Higher government borrowing costs can potentially raise funding costs across the economy, particularly for rate-sensitive sectors. At the same time, adherence to fiscal discipline helps anchor investor confidence and limits risk premia in fixed-income markets.
The broader macroeconomic backdrop remains supportive. The current account deficit for the first half of FY26 stands at around 0.8% of GDP, while foreign direct investment inflows have remained resilient, contributing to external stability.
While bond yields may remain firm in the near term due to supply considerations, the combination of fiscal consolidation, capital expenditure-led growth, and central bank liquidity management is expected to contain excessive volatility. Monetary policy is likely to remain calibrated, balancing inflation dynamics with growth considerations.
The Union Budget 2026–27 strikes a careful balance between growth support and fiscal prudence. Continued emphasis on capital expenditure strengthens the medium-term growth outlook, while a lower fiscal deficit target reinforces credibility and macro stability.
The success of this framework will depend on the realisation of revenue assumptions, effective expenditure management, and the orderly execution of the borrowing programme. For markets, bond yield movements will be shaped by the interaction between supply pressures, RBI interventions, and evolving macroeconomic conditions over the course of FY27.
*The article is for information purposes only. This is not investment advice.
