the budget announced record gross borrowing of Rs 17.2 lakh crore for FY27. that is 17% higher than FY26’s Rs 14.61 lakh crore and came in above market expectations of Rs 16 to 16.5 lakh crore. add state government borrowing of roughly Rs 14 lakh crore and the combined sovereign bond supply for FY27 is around Rs 30.5 lakh crore. 10-year yield crossed 7% on March 30, sharpest monthly rise since February 2017. analysts are calling for 7.33% by June and 7.54% by September. is this a supply story, an oil story, or both? and what does it mean for corporate bond investors?
wait so the 17.2 lakh crore is not all new spending? some of it is just paying back old bonds?
okay but even net 11.73 lakh crore is a lot of paper for the market to absorb. who is actually buying all of this?
The main buyers are domestic banks, insurance companies, provident funds, and mutual funds, with some FPI participation. Banks are mandated to hold a certain percentage of deposits in government securities via SLR requirements, which creates a structural floor for demand. The problem is that when supply exceeds this structural demand, the RBI has to step in as the marginal buyer through OMOs. In FY26, the RBI injected a record Rs 10 lakh crore via OMOs and FX swaps to keep yields from spiralling. Without similar support in FY27, analysts say the market would need Rs 3 to 4 lakh crore of RBI purchases just to absorb supply at current yield levels.
The SBI Mutual Fund fixed income CIO put it well in February. He said the bond market will continue to depend on RBI OMOs to anchor yields and that this borrowing remains a challenge that could keep yields elevated relative to underlying macroeconomic fundamentals. That is the core tension right now. The macro picture, low inflation, RBI cutting rates, would normally support lower yields. But supply is overwhelming that positive backdrop. I have seen this dynamic play out before. The RBI eventually steps in but the timing and size of OMOs is unpredictable, which keeps the market nervous.
so basically the RBI is the only real buyer keeping this market together? that sounds a bit fragile
Not quite fragile but genuinely dependent on RBI support. The IDFC First Bank report described it as a rising dependence on the RBI to meet the demand-supply gap in fixed income. The structural fix would be developing new sources of investor demand, both domestic and foreign. The FTSE and JPMorgan index inclusions are helping on the foreign side but the inflows are not yet large enough to offset the supply growth. Long term this is solvable. Short term it means yields stay elevated and the bond market remains sensitive to any signal about RBI’s OMO plans.
so for someone buying corporate bonds on BondScanner, does heavy government borrowing actually affect what I’m buying?
yes directly. corporate bond yields are priced as a spread over G-Sec yields. if G-Sec yields are elevated because of supply pressure, corporate bond yields stay elevated too. for a buyer that is actually good news right now. you are locking in at yields near multi-year highs. the supply pressure that is keeping G-Secs elevated is the same thing making corporate bonds attractive for entry. the risk is the other direction. if the RBI does aggressive OMOs and G-Sec yields fall quickly, you have locked in at high yields which looks great in hindsight. only way it hurts you is if you need to exit early and yields have moved against you.
govt borrows more = more bonds in market = yields need to rise to attract buyers net borrowing 11.73 lakh crore, not 17.2 (redemptions inflate the gross number) RBI OMOs are keeping yields from going too high for corporate bond buyers: high G-Sec yields = high corporate yields = good entry point watch RBI OMO announcements, they move the market fast