Bitter sweet budget for debt capital markets: All eyes now on Mint Street

This budget emphasises on governance, creating capacities and conditions suitable for best execution and implementation of its policies. It has laid the responsibility of future progress of the Indian economy on the large consumer population, the middle class, and the private sector. Tax slabs have been rationalised in personal income tax, increasing the purchasing power of consumers at large. The demographic dividend of our country along with emphasis on consumption seems like a step in the right direction over a medium to long term.

Markets could be a bit disappointed as there has been lesser emphasis on capital expenditure which is in line with FY 25. The government has lowered the fiscal deficit which seems like a good move staying in line with general expectations of fiscal consolidation. “Fiscal consolidation and stable borrowing numbers might lay the on us for further interest rate trajectory in hands of RBI decision to support liquidity going ahead”

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Gross borrowing (FY26 Rs 14.84 tn crore vs FY25 Rs 14tn) is higher whereas Net borrowing (FY26 Rs 11.54tn vs FY25 Rs 11.6tn) is similar to last year. This is despite the fiscal deficit projected lower at 4.4% for FY26 vs 4.4% in FY 25. This is because market borrowings as a percentage of fiscal deficit is higher this time versus the past few years and reliance on small savings schemes has reduced. The amount projected to be borrowed from small saving schemes is Rs 3.43tn in Fy26 vs Rs 4.12tn in Fy25.

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There is another Rs 2.5tn of switches budgeted in FY26 vs Rs 1.47tn in FY25. Given the factors mentioned above, market mood could get negative and bond yields may go up given they have already come down in recent weeks. However, the upcoming RBI policy on Feb 7th, continuation of liquidity infusion through OMOs (primary and secondary), VRR and FX Swaps should keep the levels anchored post initial sell off, if any.

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Going forward, the bond market would be dictated by RBI’s actions on liquidity and policy rate direction as well as global bond yields and currency movements. We feel the yield curve may get steepened in the 5yr vs 10yr segment due to potential rate cuts and continuation of liquidity infusion measures. The large quantum of SDL borrowings scheduled in this quarter may keep 10yr vs 30yr GSEC spreads and SDL vs GSEC spreads elevated in the visible future.

Source: Union budget 2025-26 dated February 01,2025 & internal research

(Author is Prashant Pimple, CIO, Fixed Income, Baroda BNP Paribas Mutual Fund)