Indian government bonds reversed early gains on Tuesday as market concerns over substantial state debt supply overshadowed the Reserve Bank of India's liquidity support measures. Despite the central bank's efforts to inject liquidity into the banking system, traders scaled back buying due to worries about absorbing the significant bond issuance scheduled for the day.

Bond Market Performance

The benchmark 10-year bond showed mixed movement during early trading hours, reflecting the competing influences of central bank support and supply concerns.

Indian financial markets remained closed on Monday due to a local holiday, with bond yields moving inversely to prices as typical market dynamics continued.

RBI Liquidity Injection Measures

The Reserve Bank of India announced after market hours on Friday its plan to inject substantial liquidity into the banking system. The central bank's support package includes over $23 billion of liquidity injection, with the program expected to extend through mid-February. Market participants are speculating that this support could potentially continue into March, though the immediate impact was overshadowed by supply-side concerns.

State Debt Issuance Concerns

The primary factor weighing on bond market sentiment was the substantial state debt supply scheduled for Tuesday. The issuance details highlight the scale of borrowing pressure facing the market.

While the actual issuance amount of 398 billion rupees was below the originally scheduled 473 billion rupees, it exceeded trader expectations, contributing to market caution about the ability to absorb such substantial supply.

Market Outlook and Budget Expectations

A private-bank trader noted that "the RBI's cash injections were expected, and are only a temporary solution to the supply-demand mismatch." The trader emphasized that market direction will largely depend on signals from India's federal budget regarding the scale of debt supply, which will influence the government's borrowing costs.

India's federal budget is scheduled for February 1, with analysts anticipating the government will announce record gross borrowing for the next fiscal year, estimated between 16 trillion rupees to 17.5 trillion rupees.

Interest Rate Movements

India's overnight index swap rates showed easing trends in early trading, tracking lower U.S. yields across different maturities.

The bond market continues to navigate between supportive central bank measures and substantial supply pressures, with upcoming budget announcements expected to provide clearer direction for government borrowing costs and market sentiment.

India's fiscal consolidation path appears firmly on track, with economists projecting continued adherence to deficit targets and steady progress on debt reduction. A comprehensive pre-Budget survey conducted by Moneycontrol reveals strong consensus among financial experts regarding the government's fiscal trajectory through FY27.

Fiscal Deficit Projections Show Steady Progress

The survey of 20 economists indicates robust confidence in India's fiscal discipline, with projections showing the fiscal deficit at a median of 4.2% of GDP in FY27. This figure represents an improvement from the government's FY26 target of 4.4%, demonstrating continued commitment to the fiscal glide path.

Economists surveyed expressed confidence that the government would meet its 4.4% deficit target for FY26, suggesting limited slippage despite pressures from tax rationalisation and a volatile global environment. The narrow range of forecasts for FY27, clustering between 4% and 4.4%, indicates strong consensus that the Centre will maintain fiscal discipline even amid external uncertainties.

Debt Consolidation Remains on Target

The survey reveals significant optimism regarding India's debt management strategy. The debt-to-GDP ratio is projected at a median of 55.2% in FY27, with estimates tightly clustered between 54.6% and 55.7%. This projection signals limited concern over fiscal slippage and demonstrates progress toward the government's medium-term debt stabilisation goal.

India has established a target of reducing its debt-to-GDP ratio to 50% by FY31, with the government expected to increasingly shift focus from headline deficit numbers to debt metrics. The relatively benign outlook reflects expectations of steady nominal GDP growth, moderate expenditure discipline, and continued reliance on market borrowing rather than off-budget financing.

Market Borrowing and Growth Dynamics

Gross market borrowing is expected to remain elevated at ₹16.5 lakh crore, representing an increase from the ₹14.82 lakh crore already raised for FY26, which itself was higher than the previous fiscal's ₹14.01 lakh crore. Despite this increase, economists appear comfortable that higher borrowing will be absorbed without materially worsening debt dynamics, particularly if growth assumptions hold.

The economic growth outlook provides a supportive foundation for these fiscal projections. Economists expect the economy to record nominal GDP growth of 10.1% this fiscal, creating favourable conditions for fiscal consolidation efforts. This growth trajectory is expected to aid in maintaining the debt-to-GDP ratio on its declining path while accommodating necessary government expenditure.

Outlook for Fiscal Policy

The survey results demonstrate broad confidence in India's fiscal management capabilities despite global uncertainties. The tight clustering of projections across key metrics suggests that economists view the government's fiscal targets as both realistic and achievable. The combination of disciplined spending, steady growth, and strategic borrowing appears to be creating conditions conducive to sustained fiscal consolidation without compromising economic development priorities.