Lagged Impact Of Higher Oil Prices, Currency Weakness, Fiscal Pressures To Stay
Vinay Pai,
MD & Head of Fixed Income,
Equirus Group
Mumbai, March 27, 2026: The Government of India’s decision to limit H1 FY27 borrowing to Rs8.2 lakh crore which is around 51% of the full-year target versus 54% last year appears well-calibrated given the evolving macro backdrop. The sharp reduction in ultra-long bond issuance also signals a conscious effort to avoid pressure on long end yields impacting the yield curve and improve market absorption.
However, the external environment remains challenging, The ongoing Iran conflict has pushed crude oil prices above $100, posing risks of a sustained widening in India’s current account deficit if elevated levels persist. Currency volatility is already reflecting this stress, with weaker capital flows and continued foreign outflows adding pressure on the rupee. This, in turn, raises the risk of imported inflation, keeping bond yields biased upward.
Domestic growth drivers are also facing headwinds. Export momentum may soften amid global trade disruptions, while elevated input costs could weigh on corporate margins and tax collections, which were budgeted on 7% GDP growth assumption. At the same time, rising fertiliser and input costs may necessitate higher government support for agriculture and MSMEs, increasing subsidy pressures.
While the borrowing strategy reflects better calibration compared to last year, market conditions suggest yields could remain elevated for a significant part of the fiscal year. Even if geopolitical tensions ease, the lagged impact of higher oil prices, currency weakness, and fiscal pressures is likely to persist.
Summary:
Despite a more measured borrowing approach, bond yields are expected to stay elevated, driven by oil-led inflation risks, a widening current account deficit, currency volatility, and potential fiscal pressures from higher subsidies and weaker revenue growth.
