Can the RBI Intervene After India’s ₹17.2 Lakh Crore Borrowing Surge?

Even as the Union government projects fiscal prudence in Budget FY27, the bond market is showing visible signs of stress. The Centre plans to raise a massive ₹17.2 lakh crore through market borrowings, sparking concerns over whether investors can absorb such a large supply of government securities. Rising yields and market nervousness suggest that stabilising the bond market may not be easy. With debt levels elevated after the pandemic, attention is now turning to whether the Reserve Bank of India (RBI) will need to lend a helping hand.

Rising Borrowings: The Scale of the Challenge

• Despite efforts to control expenditure, the government has budgeted ₹17.2 lakh crore of gross market borrowing for FY27, which is 16% higher than FY26 Budget Estimates.
• For FY26 itself, the bond market struggled to absorb ₹14.82 lakh crore of borrowings.
• This sharp rise in supply has increased pressure on bond prices and pushed yields upward.
• For investors, higher supply without matching demand raises fears of capital losses, making the borrowing programme an uphill task.

India’s Expanding Debt Stock

• India’s public debt surged during the Covid-19 period and remains elevated due to high capital expenditure and sticky revenue spending.
• By September 2025, outstanding central government dated securities stood at ₹121.37 lakh crore, while state government securities were ₹67.21 lakh crore.
• This marks a near doubling from September 2019, when Centre’s borrowings were ₹63.14 lakh crore.
• Since then, Centre’s borrowing has grown at 11.5% CAGR, while states’ borrowing expanded even faster at 13.8% CAGR.

Why the Bond Market Is Nervous

• Bond markets are sensitive to supply-demand imbalances.
• When government borrowing rises sharply, yields tend to increase unless demand expands proportionately.
• Higher yields raise borrowing costs for the government and spill over into corporate bonds, bank lending rates and housing loans.
• The current nervousness reflects worries that domestic institutions may not be able to absorb the supply without yield spikes, increasing the cost of capital across the economy.

Will RBI Have to Lend a Hand?

• In such situations, markets often expect the central bank to step in.
• The RBI can support the bond market through open market operations (OMOs), liquidity infusion, or secondary market purchases to smooth volatility. While the RBI prioritises inflation control, excessive bond market stress could threaten financial stability.
• Balancing inflation management with bond market stability will be a key policy challenge in FY27.

Global Context: India Is Not Alone

• India’s debt surge mirrors a global trend. Post-pandemic stimulus, geopolitical tensions, and weak global growth have pushed governments worldwide to borrow heavily.
• The International Monetary Fund (IMF) projects global public debt to cross $100 trillion by end-2025.
• This context provides some comfort, but emerging markets like India remain vulnerable to capital flow volatility and global interest rate movements.

Question

Q. Which institution may intervene to stabilise the bond market if yields rise sharply?

A. SEBI
B. Ministry of Finance
C. RBI
D. NPCI