Record Borrowing Plan Puts Pressure on Indian Rupee and Bonds
Mumbai, Monday, 2 February 2026.
New Delhi’s unexpected 17.2 trillion rupee borrowing target has rattled investors, driving the currency toward historic lows and complicating the Reserve Bank of India’s upcoming policy decision.
Fiscal Jolt: Borrowing Exceeds Forecasts
The financial markets began the week on unsteady ground after Finance Minister Nirmala Sitharaman announced a record gross borrowing plan of 17.2 trillion rupees ($187.63 billion) for the fiscal year starting April 1 [1][2]. Unveiled during the Union Budget presentation on Sunday, February 1, this figure represents a sharp increase of approximately 17.728 percent over the current year’s 14.61 trillion rupees [1]. The target significantly overshot market expectations, surpassing the 16.5 trillion rupees forecast by analysts in a Bloomberg survey [2]. This aggressive debt issuance strategy has raised immediate concerns regarding a supply-demand imbalance in the bond market, with net borrowing also set to rise to 11.73 trillion rupees [1].
Market Vulnerability and Currency Strain
The timing of this announcement places additional strain on the Indian rupee, which had already weakened to a record low of 91.9875 per dollar on Friday, January 30, closing just shy of the 92 mark [1]. The currency’s depreciation, driven by a decline of more than 2% in January, coincides with significant capital outflows; foreign institutional investors withdrew 19 billion rupees in 2025 and an additional 4 billion rupees in January 2026 [1][4]. Traders now anticipate the benchmark 10-year bond yield will fluctuate between 6.62% and 6.75% leading up to the central bank’s decision later this week [1]. Vivek Rajpal, an Asia macro strategist at JB Drax Honore, noted that the higher-than-expected borrowing numbers suggest that issues surrounding the absorption of government debt are likely to persist [1].
The RBI’s Policy Dilemma
The Reserve Bank of India (RBI) faces a complex backdrop as it prepares for its monetary policy decision on Friday, February 6 [1][3]. While the central bank is widely expected to maintain the policy rate at 5.25%, following a 25 basis point cut in December, the pressure to manage the rupee’s valuation may influence its stance [3]. The RBI has previously cut rates by 125 basis points in 2025, but the transmission of these cuts has been obstructed by rising yields and liquidity constraints [1]. With the government’s heavy borrowing calendar, the central bank may be forced to act as the “marginal buyer of government debt” to maintain stability, according to Rajpal [1].
Balancing Growth with Fiscal Discipline
Despite the market’s anxiety over debt levels, the government maintains a focus on growth and fiscal consolidation. The budget targets a fiscal deficit of 4.3% of GDP for the 2026-27 fiscal year, down from the revised estimate of 4.4% for the current year [1][4]. To stimulate economic activity, the administration has proposed a 9% increase in capital expenditure to 12.2 trillion rupees ($133 billion), prioritizing sectors such as railways, urban infrastructure, and AI [4]. However, external headwinds remain strong; the U.S. dollar index rose 1% on Friday, January 31, bolstered by higher U.S. bond yields following the selection of Kevin Warsh as the next Federal Reserve chair [1]. These global factors, combined with domestic fiscal pressures, leave Indian assets exposed to heightened volatility in the immediate term [1][3].