Budget FY2027: High Borrowing May Keep Yields Sticky Amidst Fiscal Shift

• The upcoming Union Budget for FY2027 will introduce a shift from annual fiscal deficit targets to debt consolidation, aiming for a debt-to-GDP ratio of 50 ±1% by March 31, 2031.
• The 16th Finance Commission's recommendations will begin implementation in FY2027, potentially altering tax revenue distribution and grants between the central government and states.
• ICRA projects a fiscal deficit cap of 4.3% of GDP for FY2027, slightly below the 4.4% budgeted for the current year, to achieve a 1 percentage point annual debt ratio decline.
• Despite an expected 9.8% nominal GDP growth, gross tax revenues are projected to grow by only 7% in FY2027 due to GST rationalization and cess modifications.
• Total gross market issuances (Centre and States) are estimated to reach nearly Rs. 30 trillion in FY2027, up from Rs. 27.2 trillion in FY2026, which could keep bond yields sticky.

Why It Matters: FY2027 Budget's significant borrowing and fiscal shifts are likely to maintain sticky bond yields.