Government address Borrowing Concerns with fresh bilateral switches

In a move aimed at easing supply pressures next year, the government on Thursday switched ₹755 billion of bonds maturing in 2026-27 with the Reserve Bank of India, reducing projected gross market borrowing for 2026-27 to ₹16.44 trillion from the budgeted ₹17.20 trillion.

The bilateral switch lowers redemptions in 2026-27 to ₹4.71 trillion from ₹5.47 trillion estimated in the Budget. While net market borrowing remains unchanged at ₹11.73 trillion, the cut in gross issuance will reduce pressure on the bond market, which had been wary of the record supply slated for next year.

Even after the reduction, the ₹16.44 trillion borrowing programme will be marginally higher than the previous record of ₹16.43 trillion in 2023-24 and well above the ₹14.61 trillion projected for the current financial year.

Switch operations allow the government to replace near-term securities with longer-dated bonds, smoothing the redemption profile and extending the average maturity of government debt. In the latest operation, four bonds maturing in 2026-27 were swapped for a security maturing in 2040, effectively pushing repayments into later years.

The transaction takes total gilt switches in the current financial year to ₹2.40 trillion, including a ₹373 billion bilateral switch conducted with the RBI in May 2025. The Budget had projected revised estimates for switches in 2025-26 at ₹1.64 trillion.

At the press conference following the monetary policy review, RBI Governor Sanjay Malhotra emphasised that net borrowing, not gross market borrowing, was the more relevant measure of the government’s financing burden.

“We have been looking at the gross numbers, which I don't think is the correct way to look at it, frankly… There are much more redemptions next year than there were last year. As a result, the gross calendar will obviously be higher… We should really be looking at net,” he said.

The governor also said the Budget had projected partly funding the fiscal deficit through treasury bills, which will help manage the yield curve more effectively. He also said the budgeted borrowing from small savings is quite conservative, suggesting there is scope for borrowing more through these instruments. The Budget had projected net borrowing from small savings in 2026-27 at ₹3.87 trillion, up 3.9% from the revised estimate of ₹3.72 trillion.

The bond market welcomed the move. On Friday, the yield on the 6.48% 2030 benchmark government bond opened more than three basis points lower at 6.65%, reflecting relief over reduced supply.