Mirae Asset Expert Outlines Budget 2026 Expectations
Basant Bafna, who leads the fixed income division at Mirae Asset Investment Managers in India, has shared his insights on the upcoming Budget 2026. He believes the government will maintain a strong focus on fiscal consolidation while ensuring economic growth continues. In a recent interview, Bafna discussed how this approach might affect bond markets and investor strategies.
Fiscal Consolidation Path Remains Steady
India's commitment to reducing its fiscal deficit remains firm, though the speed might slow down slightly. The government aims to lower the debt-to-GDP ratio from around 56% to nearly 50% over the next five years. Strong economic growth, supported by consistent government capital spending and potential benefits from GST reforms, should help achieve this goal.
However, short-term revenue challenges persist. To address these, the government may need to rely more on disinvestment and asset monetization efforts. Overall, Bafna notes that the administration appears dedicated to fiscal discipline rather than populist measures, striking a balance between growth-oriented expenditures and prudent financial management.
Bond Market Implications and Borrowing Trends
On the bond market front, net borrowings for FY27 are expected to hover between ₹11.5 trillion and ₹12 trillion. This range aligns closely with the FY26 level of ₹11.3 trillion. Central government borrowings are likely to remain stable, but state borrowings could increase compared to the previous fiscal year.
Yields on central government securities should find support due to the government's fiscal consolidation efforts. Current spreads are higher than historical averages, which provides some cushion. However, elevated supply in State Development Loans (SDLs) and muted demand may limit yield compression. Spreads are expected to stay firm under these conditions.
Investment Strategy and Portfolio Adjustments
Given the budget's expected emphasis on fiscal consolidation and growth, the outlook for fixed income remains steady. Bafna suggests that investors do not need to make significant changes to their debt portfolios ahead of the Union Budget. The government's commitment to balancing spending with debt reduction indicates no abrupt policy shifts that would warrant major adjustments.
For those considering bond investments amid geopolitical uncertainties, spreads are currently elevated compared to three-year averages. For example, AAA PSU Corporate Bond spreads over sovereign yields are higher across various segments. The Reserve Bank of India continues to implement measures for smooth liquidity transmission, and as global volatility stabilizes, spread compression could occur. However, increasing bond exposure should depend on an investor's risk appetite and time horizon, as market dynamics remain sensitive.
RBI Policy and Rate Trajectory Outlook
The RBI has already cut rates by 125 basis points in 2025, leaving limited room for further easing in the near term. Additional rate cuts would likely require growth falling below 6% or inflation undershooting expectations. The central bank's focus is expected to remain on transmitting the rate cuts already implemented.
A new Consumer Price Index series, set for release in February, could provide tailwinds if it significantly undershoots expectations, potentially opening space for more rate cuts. For investment strategy, demand-supply dynamics will drive corporate debt yields. Near-term yields may stay elevated due to supply pressures from high credit-deposit ratios at banks, but the medium-term outlook is constructive with contained inflation and high spreads.
A balanced barbell strategy—combining accrual with selective duration exposure—is prudent to navigate rate movements and manage supply-side pressures effectively.
Overseas Bond Investment for Retail Investors
Indian retail investors can access select global debt funds, particularly those focused on US fixed income markets. These instruments offer diversification benefits but require a nuanced understanding of global interest rate cycles and currency risks. Investors should approach them with a clear view of their risk tolerance and investment horizon, as conditions can vary widely.
Disclaimer: This article is for educational purposes only. The views expressed are those of the expert and not necessarily reflective of broader market opinions. Investors are advised to consult certified experts before making any investment decisions, as market conditions can change rapidly.
