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3 Feb 2026·Source: The Indian Express
3 min
EconomyNEWS

Benchmark Bond Yields Increase Amid Record Government Borrowing Plans

Benchmark 10-year bond yields rise due to the government's record borrowing plan.

Benchmark Bond Yields Increase Amid Record Government Borrowing Plans

Photo by Kiko Camaclang

Benchmark 10-year bond yields have increased due to the government's record borrowing plan. This increase reflects market reactions to the government's fiscal strategy and its impact on interest rates.

UPSC Exam Angles

1.

GS Paper III: Indian Economy - Government Budgeting

2.

Connects to fiscal policy, monetary policy, and debt management

3.

Statement-based MCQs on FRBM Act and government borrowing

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Background

The increase in benchmark bond yields is closely tied to the government's borrowing program. Understanding the history of government debt management in India provides context. Initially, government borrowing was largely ad hoc. However, the introduction of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 aimed to bring fiscal discipline and manage government debt more effectively. The FRBM Act set targets for reducing the fiscal deficit. Over time, these targets have been revised and sometimes suspended due to economic shocks, such as the 2008 financial crisis and the recent COVID-19 pandemic. These events led to increased government borrowing to stimulate the economy. The evolution of debt management also includes the development of the government securities market and the role of the Reserve Bank of India (RBI) in managing government debt. The legal and constitutional framework for government borrowing is primarily governed by the Constitution of India and the Government Securities Act, 2006. Article 292 of the Constitution empowers the Union Government to borrow on the security of the Consolidated Fund of India, within the limits prescribed by the Parliament. The RBI acts as the debt manager for the government, conducting auctions and managing the yield curve.

Latest Developments

Recent government borrowing plans have been influenced by the need to finance fiscal deficits arising from increased spending and lower tax revenues. The government's response to the COVID-19 pandemic involved significant fiscal stimulus, leading to higher borrowing. This has put upward pressure on bond yields. The market reaction to government borrowing plans reflects concerns about the sustainability of government debt and the potential impact on inflation. Different stakeholders, including investors, economists, and rating agencies, have expressed varying views on the government's fiscal strategy. The RBI's monetary policy plays a crucial role in managing liquidity and influencing interest rates in the context of government borrowing. The future outlook for government borrowing depends on the pace of economic recovery and the government's commitment to fiscal consolidation. The government has set targets for reducing the fiscal deficit in the medium term. However, achieving these targets will require careful management of government spending and revenue mobilization. The upcoming budget will be a key indicator of the government's fiscal strategy.

Frequently Asked Questions

1. What are benchmark bond yields and why are they important for the economy?

Benchmark bond yields are the returns an investor can expect from a specific government bond, typically the 10-year bond. They are important because they influence other interest rates in the economy, affecting borrowing costs for businesses and individuals.

2. How does increased government borrowing affect benchmark bond yields?

When the government borrows more money, the supply of bonds in the market increases. To attract investors, the government may need to offer higher yields, leading to an increase in benchmark bond yields. This is because increased borrowing can raise concerns about the government's ability to repay the debt, leading to higher perceived risk.

3. What is the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and why is it relevant to the current situation?

The FRBM Act, 2003 aimed to bring fiscal discipline and manage government debt more effectively. It is relevant because the recent increase in government borrowing, leading to higher bond yields, highlights the challenges in maintaining fiscal discipline, especially when responding to economic crises like the COVID-19 pandemic.

4. Why have benchmark bond yields increased recently?

Benchmark 10-year bond yields have increased recently due to the government's record borrowing plan. This plan is influenced by the need to finance fiscal deficits arising from increased spending and lower tax revenues, especially in response to events like the COVID-19 pandemic.

5. How might the increase in benchmark bond yields affect common citizens?

Increased bond yields can lead to higher interest rates on loans for consumers and businesses. This can make it more expensive to borrow money for things like mortgages, car loans, and business investments, potentially slowing down economic growth.

6. What should a UPSC aspirant focus on regarding benchmark bond yields for the Prelims exam?

For the Prelims exam, focus on understanding the relationship between government borrowing, bond yields, and inflation. Understand the basic concepts and how they interrelate. Remember that increased government borrowing can lead to higher bond yields, potentially impacting inflation.

Practice Questions (MCQs)

1. Consider the following statements regarding the Fiscal Responsibility and Budget Management (FRBM) Act, 2003: 1. It mandates the central government to reduce the fiscal deficit to 3% of GDP. 2. It only applies to the central government and not to state governments. 3. It was enacted in response to concerns about rising levels of government debt. Which of the statements given above is/are correct?

  • A.1 and 2 only
  • B.1 and 3 only
  • C.2 and 3 only
  • D.1, 2 and 3
Show Answer

Answer: B

Statement 1 is CORRECT: The FRBM Act 2003 initially mandated the central government to reduce the fiscal deficit to 3% of GDP, although this target has been revised and sometimes suspended. Statement 2 is INCORRECT: While the FRBM Act primarily focuses on the central government, many states have also enacted their own versions of the FRBM Act to promote fiscal discipline. Statement 3 is CORRECT: The FRBM Act was indeed enacted in response to concerns about rising levels of government debt and fiscal deficits.

2. Which of the following is the primary function of the Reserve Bank of India (RBI) in relation to government borrowing?

  • A.Directly financing the government's fiscal deficit
  • B.Managing the government's debt and conducting auctions for government securities
  • C.Approving the government's borrowing plans
  • D.Setting the interest rates on government bonds
Show Answer

Answer: B

The RBI acts as the debt manager for the government. Its primary function is to manage the government's debt, which includes conducting auctions for government securities, managing the yield curve, and advising the government on borrowing strategies. While the RBI influences interest rates through its monetary policy, it does not directly set the interest rates on government bonds.

3. In the context of government borrowing, what does the term 'bond yield' refer to?

  • A.The total amount of money borrowed by the government
  • B.The rate of return an investor receives on a bond
  • C.The face value of a government bond
  • D.The maturity period of a government bond
Show Answer

Answer: B

Bond yield refers to the rate of return an investor receives on a bond. It is influenced by factors such as interest rates, inflation expectations, and the creditworthiness of the issuer. When government borrowing increases, it can put upward pressure on bond yields as investors demand a higher return to compensate for the increased risk.

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