India’s fixed-income market is adjusting to a new policy setting following the Union Budget 2026–27, with the Reserve Bank of India (RBI) expected to remain on hold. For bond investors, the conversation has quickly shifted from “how low can yields go” to a more nuanced question — how to earn steady returns in a world of heavy government supply, stable policy rates, and persistent global crosscurrents.
The Budget stayed true to its consolidation roadmap while continuing to prioritize growth. The The fiscal deficit target for FY27 has been set at 4.3% of GDP, marginally lower than last year, reinforcing the government’s commitment to gradual discipline. At the same time, gross market borrowing has been budgeted at a record ₹17.2 trillion, with net borrowing of ₹11.73 trillion, underscoring the scale of funding required to support infrastructure, manufacturing, and logistics.
For the bond market, this mix carries an important implication. While fiscal discipline enhances long-term credibility, the immediate reality is that supply will remain heavy. Not surprisingly, the benchmark 10-year G-sec yield has edged higher as markets digest the borrowing calendar and the likely weekly auction intensity.
There are, however, softer edges to the fiscal story. The government has indicated a gradual decline in the debt-to-GDP ratio and an expansion in capital expenditure to about ₹12.2 lakh crore. Capital spending tends to have a higher growth multiplier than revenue spending, which improves medium-term growth prospects and, by extension, the sustainability of public finances. For bond investors, this is a subtle but meaningful positive.
RBI: Steady is the new supportive
On the monetary front, the RBI appears comfortable maintaining a pause after earlier rate cuts brought the repo rate down to 5.25%. Inflation has moderated meaningfully from last year’s peaks, but global uncertainties and energy price risks argue against premature optimism.
For fixed income markets, a stable policy rate combined with adequate system liquidity can still be constructive. It anchors the front end of the curve and allows carry and roll-down strategies to work. At the same time, with fiscal supply elevated, it is sensible to be conservative on duration rather than position aggressively for a large rally in long bonds.
Global factors still set the outer boundary
Indian bonds continue to take cues from abroad. US Treasury yields remain firm by historical standards, and periodic spikes in crude oil prices keep inflation risk alive. These forces act as a ceiling on how far domestic yields can fall, regardless of local macro improvements.
In this environment, expecting a sharp downward shift in the entire yield curve may be unrealistic. Expecting stable-to-range-bound yields, however, is a far more defensible base case.
Building returns when yields go sideways
When big directional calls are unlikely to pay off, portfolio construction becomes the real source of alpha.
- Emphasis accrual: Short to medium-duration high-quality bonds can lock in attractive carry with limited mark-to-market volatility.
- Selective duration exposure: Hold some longer-dated government or AAA bonds for diversification, but avoid excessive concentration.
- Add calibrated high-yield exposure: Carefully chosen high-yield or lower-rated credits—backed by strong cash flows, improving balance sheets, and clear refinancing visibility—can materially enhance portfolio accrual. The emphasis must be on selectivitynot blanket exposure.
- Diversify across issuers and sectors: Reduces idiosyncratic risk and improves portfolio resilience.
A well-constructed accrual-oriented portfolio that blends high-quality core holdings with measured doses of high-yield credit can potentially deliver superior risk-adjusted returns even in a flat yield environment.
The bigger picture
The post-Budget message for bonds is one of realism. Fiscal consolidation is intact, but borrowing is large. Inflation is better behaved, but global risks persist. The RBI is supportive, but not in easing mode.
Put together, this is not a backdrop for bold duration bets. it is a backdrop for disciplined income generation.
For investors, the opportunity lies less in predicting dramatic yield moves and more in building robust portfolios that harvest carry, manage risk prudently, and use selective credit exposure to enhance returns. In a world where policy patience meets fiscal pragmatism, accrual, quality, and selectivity are likely to be the enduring drivers of fixed income performance.
(Chirag Doshi is CIO – Fixed Income Assets at LGT Wealth India.)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
