The Indian government bond yields have surged to a one-year high following the Union Budget 2026 presentation on February 1st. The yield on the 10-year bond reached 6.78%, the highest since January 2025, after the government announced a higher-than-expected gross borrowing plan. This has sparked concerns about rising borrowing costs and potential implications for the stock market.

The government's gross borrowing is projected to be a record ₹17.20 trillion ($187.63 billion) for the fiscal year 2027. This is significantly higher than the current year's ₹14.61 trillion and also exceeds market expectations, which were in the range of ₹16 trillion to ₹16.5 trillion. The increased borrowing is intended to meet the government's fiscal deficit target of 4.3% of GDP and to bring the debt-to-GDP ratio down to 55.6% in the next fiscal year.

The announcement of higher-than-expected borrowing has led to concerns about a supply-demand imbalance in the government bond market. According to Vivek Rajpal, Asia macro strategist at JB Drax Honore, the Reserve Bank of India (RBI) may need to continue to be the marginal buyer of government debt to manage this imbalance.

Impact on the Stock Market

Rising bond yields can have several implications for the stock market:

• Increased Opportunity Cost: As bond yields rise, the opportunity cost of investing in equities increases. Bonds become more attractive to investors seeking safer, fixed-income returns, potentially leading to a shift away from the stock market.
• Higher Cost of Capital: Rising bond yields can increase the cost of capital for companies. This can compress the valuations of stocks, as it becomes more expensive for companies to borrow money for investments and growth.
• Impact on Banking Stocks: Banking stocks may be negatively affected by rising bond yields, as it can impact their treasury gains.
• Rupee Volatility: Increased government borrowing can put pressure on the Indian rupee, potentially leading to a weaker currency. The rupee is anticipated to decline past 92 per dollar. However, on Monday, the rupee strengthened by 19 paise, reportedly due to the RBI selling dollars offshore to support the currency.

RBI Intervention and Future Outlook

The RBI's role will be crucial in managing the impact of increased government borrowing on bond yields and the stock market. Market participants anticipate that the RBI will intervene to curb excess volatility in the rupee and to manage the supply-demand dynamics in the bond market.

Going forward, the bond market is expected to remain volatile due to the increased supply of government bonds. Traders predict a further rise in the 10-year government bond yield in the coming weeks. The rising financing costs could put a strain on India's economy, especially with existing challenges such as trade tariffs.