IGI Logo

Executive Summary

Union fiscal deficit remains in check for now, though the outlook remains muddled

Direct tax collections have grown handsomely in YTDFY27. Albeit their enthusiasm has been dampened by sulking GST collections, leading to a gross tax collection growth of just 6.5% y/y in 5MFY27. The recent recovery in transfer to States/UTs further depresses the net tax kitty, with only stellar asset monetisation related inflows propping up a middling receipts account. On the other hand, expenses have grown solidly, with the Union pushing the accelerator on capex and upwards risks to fertiliser and food subsidy looming. Achieving the fiscal deficit target for FY27 remains contingent on unfavourable base effects of the GST wearing off and sustained momentum in direct tax collections.

Union gross borrowing slashed as Government postpones its liabilities

The Union is set to borrow Rs. 7.8 trn in gross terms in H2FY27. This is 49% of the total for this fiscal - a multi-year high. Borrowing in H2FY27 will be through 23 weekly auctions of Rs. 330 bn – Rs. 360 bn. Gross borrowings for FY27 are slashed to Rs. 15.99 trn from a Budgeted figure of Rs. 17.20 trn. The reduction is due to extensive switch/conversion auctions and slightly lower borrowing vs. indicating in H1. Net borrowing is expected to remain in line with Budget.

Borrowings will be across 3-, 5-, 7-, 10-, 15-, 30-, 40-, and 50- year tenors in H2FY27. The share of ultra-long tenors has shrunk from a peak of 38% in FY25 to 28% in H2FY27. This will have a smaller impact on outstanding profile than usual due to switch/conversion operations elongating tenor profile. We believe that the share of banks in G-sec ownership, which is at a decadal low, is poised to inch up in the medium term, benefitting from greater issuances in their tenors of choice.

Short-term borrowing through T-bills ballooning

T-Bill borrowing is indicated at Rs. 2.99 trn in Q3FY27, with Rs. 1.04 trn each in 91- and 182- day T-Bills and Rs. 910 bn in 364-day papers. This represents a massive 21.1% y/y surge in borrowings. In Q2FY27, actual borrowing was at Rs. 4.84 trn vs. Rs. 3.36 trn indicated. In Q3 too, higher borrowing than indicated may be seen. Consequently, we expect T-Bill outstanding to increase by end of this fiscal, compared to an easing trend witnessed in FY25 and FY26. Issuances in Q3FY27 shall be executed as equal weekly auctions of Rs. 230 bn and concentrated at the lower tenors. The RBI has also allowed for a WMA limit of Rs. 500 bn for H2FY27 to take care of short-term mismatches for the Union.

Big bang Q3FY27 planned by States after a damp H1

States cumulatively borrowing a whiff lower on year in H1FY27 and chimed in just under Rs. 5 trn. States have loaded up their borrowing schedule for Q3FY27, with Rs. 3.6 trn indicated (up 43% y/y from Q3FY26). We expect gross borrowings of States to increase moderately in FY27, by ~4.5% y/y after significant increase was seen in FY26. Rs. 2.78 trn of the total planned borrowing is from States which have given the maturity bucket as well. These States have concentrated their borrowings in the 11-15- and 16–20-year buckets (24% each). This is in line with a secular trend with States elongating their borrowing profile in recent years - weighted average tenor of issuances has gone up from 10.01 years in FY16 to 16.64 years in H1FY27.

Despite the gross borrowing balm, yields refuse to stay calm

The revision in nominal GDP and unchanged net G-sec issuance exert upward pressure on fiscal deficit, even as a lower gross borrowing augurs well. Even so, upward drivers for benchmark Union G-sec yield dominate. The Iran War shows no imminent signs of ending, Brent crude prices remain stiff, and domestic inflation is getting embedded into the Core. Markets are smelling a rate hike sooner rather than later, and the OIS curves have perked up accordingly. 10Y Union G-sec benchmark yields are up ~35bps since last policy. Conditions in bond market point towards higher yields until the conflict eases and base effects subdue inflation some time in FY28.

Above views are of the author and not of the website kindly read disclaimer