The Indian government is expected to announce a borrowing plan of Rs 14-15 lakh crore for the fiscal year 2025-26, according to economists and treasury heads. The government will likely raise these funds through dated securities in the upcoming Budget for FY26.
Industry experts also predict a slight reduction in the fiscal deficit target for FY26, which is expected to be lower than the initial estimate of 4.5% of the Gross Domestic Product (GDP).
Borrowing Details for FY26
Sakshi Gupta, Principal Economist at HDFC Bank, stated that for FY26, the government’s gross borrowings will likely be around Rs 14.5-14.8 lakh crore, with net borrowings estimated to be around Rs 11.2 lakh crore. For the current financial year (FY25), the fiscal deficit target is set to be around 4.7% of GDP, with a more modest target of 4.4% set for FY26.
Gupta mentioned that a slight reduction in market borrowings might be possible if the government opts to conduct a switch with the Reserve Bank of India (RBI). The redemption of certain GST bonds in FY26 could also provide the government with some flexibility, possibly lowering market borrowings to below Rs 14 lakh crore.
Switching with RBI and GST Bond Redemption
Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership, suggested that the government could reduce gross borrowings by Rs 1.7 trillion through a switch with the RBI and the premature redemption of GST bonds. He highlighted that the RBI holds bonds worth approximately Rs 1 lakh crore, and using these bonds in a switch could help lower borrowings.
Comparison to FY25 Borrowing Plans
The expected borrowing amount for FY26 is in line with the borrowing plan for FY25. In July 2024, Finance Minister Nirmala Sitharaman announced a borrowing target of Rs 14.01 lakh crore for FY25 to finance a fiscal deficit of 4.9% of GDP. By the end of the first half of FY25, the government had borrowed nearly Rs 7 lakh crore, with plans to borrow an additional Rs 6.61 lakh crore in the second half.
Lower Borrowing Costs Expected
Experts anticipate that the borrowing cost for the government will decrease in FY26 due to an expected rate cut by the Reserve Bank of India (RBI) and increased inflows from foreign investors in the global bond index. The 10-year benchmark government bond yield, which started the current fiscal year at 7.22%, has eased to 6.68% by January 2025.
Government borrowing plays a crucial role in determining interest rates across the economy. If government borrowings exceed expectations, it could push up rates for both sovereign and corporate bonds. On the other hand, lower-than-expected borrowing could lead to a decrease in interest rates.
Market Borrowings Explained
Market borrowings are loans that the government takes to finance its expenditure on public services. The government typically raises these funds through government securities and Treasury bills.
Fiscal Deficit Target for FY26
Despite the possibility of reduced borrowings, experts believe that the government is unlikely to revise its fiscal deficit target downward. Kanika Pasricha, Chief Economic Advisor at Union Bank of India, emphasized that while the fiscal deficit target for FY26 may remain at 4.5%, it is important for the government to support economic growth. She advocates for a slower pace of fiscal consolidation to achieve this balance.
