Maintaining a trend of steadily reducing fiscal deficit, Budget 2026 indicated that the figure for FY26 was 4.4 per cent. This is further expected to fall to 4.3 per cent in FY27.
As the transition to a debt-to-GDP regime starts, the figure is 56.1 per cent for the current fiscal and is expected to go down further to 55.6 per cent in FY27.
The glide path appears well on course to achieving the target of 50 per cent debt-to-GDP figure by 2030.
However, the higher market loans (gross) figure of ₹17.2 lakh crore for FY27 could be a tad negative, up as it is up by 17.7 per cent over the revised estimates for FY26. The government hopes to collect Rs 3.87 lakh crore via small savings scheme in FY27. The revised estimate for FY26 is 3.72 lakh crore versus ₹3.43 lakh crore planned in the Budget 2025, or 8 per cent higher.
All things considered, the budget is neutral to marginally negative at the margins for the bond market.
Different drivers
In the last couple of months, bond yields on shorter tenor commercial papers (CPs) and certificates of deposits (CDs) have risen sharply. Three month CP yield is up 104 basis points in just the last month to 7.25 per cent and three-month CD yields are up 115 basis points over the same period to 7.33 per cent. One-year CP yields are up 40 basis points over the past month to 7.15 per cent and one-year CD yields are higher by 42 basis points to 7.14 per cent. These are data points from Kotak MF (sourced from Refinitiv, CCIL).
In fact, the 3-month CD yield is higher than the repo rate by 208 basis points, a spread that is highest in the past five years.
Even the 10-year g-sec yield is higher by 11 basis points in the past month.
A combination of higher credit-deposit ratio (over 82 per cent), tenor mismatch between banks and mutual funds (one year funds versus a few months), FPI outflows, RBI moves on forex interventions are all adding to the spike, though the Central Banks is periodically infusing liquidity. Cash in circulation of ₹39.8 lakh crore as of Jan 15, 2026 is a new all-time high according to the RBI and that adds to the liquidity crunch on the banking system as do higher yields on State development loans (SDLs).
These sharp spikes may normalise in the coming months as more liquidity is infused and some of the factors mentioned earlier are addressed.
However, this sharp move has caused a change in trajectory of a steepening yield curve even a month or so back to a situation where short-term yields are higher than longer term yields.
As such the Budget 2026 is largely neutral from the bond market perspective and may not be the prime mover.
Since short and medium term yields are north of 7 per cent, this situation can be used by investors to benefit from investing in these tenors, investors can consider money market and select medium duration/corporate bond funds in the five-year or lower tenors.
Published on February 1, 2026
