Budget's financing strategy pushing bond yields higher, warns Axis Bank economist

Neelkanth Mishra sits atop the research operation at Axis Bank, and what he sees in the numbers troubles him. The Union Budget for 2026 is fiscally disciplined—the government has shown restraint on spending, held the line on deficits. By all conventional measures, it should be working. Yet the bond market is moving the wrong way. Ten-year yields have climbed to 6.76 percent, a level that contradicts the fiscal prudence on display. With the kind of budgetary caution the government has exercised, Mishra argues, those yields should be sitting closer to 6 percent instead.

The culprit, he believes, is not what the government is spending but how it plans to pay for it. The Budget rests on conservative assumptions about growth and tax revenues—reasonable enough on their face. But the real problem lies in the government's forecast for small savings inflows. Collections from these schemes have actually surged this year, running well ahead of expectations. Yet the Budget assumes they will drop significantly in the months ahead. This means the government is expecting to receive roughly one to one-point-two lakh crore rupees less than it likely will. The math forces an uncomfortable conclusion: the government has announced a larger borrowing program than it actually needs.

That excess borrowing is what's unsettling the bond market. It's a peculiar kind of self-inflicted wound. The Budget itself is well-designed, Mishra notes—predictable, stable, free of the surprises that unsettle business planning. The government has avoided wasteful spending and maintained focus on fiscal consolidation, moves that should ordinarily keep borrowing costs down. Yet here the yields are, climbing anyway. There's an irony in that contradiction that Mishra does not shy away from naming.

Another factor compounds the pressure. The government typically maintains cash balances in the range of two-point-five to three lakh crore rupees parked within the banking system. That money, sitting idle in government accounts, effectively drains liquidity from banks. Despite all the fiscal discipline, despite the careful design, the system is tightening. Mishra frames this as an operational problem that demands a joint solution from the government and the Reserve Bank of India.

The consequences ripple outward. If bond yields stay elevated, the impact extends far beyond the bond market itself. The economy still has slack—there is unused capacity, an output gap that needs closing. The government is right to pull back on fiscal stimulus; that burden now falls to monetary policy and interest rate cuts. But if rates do not decline meaningfully, the recovery will stretch longer. The output gap will take much longer to close. Mishra sees evidence of this already in the recent weakness in banking stocks, a visible sign of the strain.

On the Budget's proposals for data centers, Mishra offers a more measured view. The tax changes are enabling measures, designed to let global companies operate in India while serving other regions without running afoul of data localization rules. But tax incentives alone will not drive large investments. The real determinants are practical: the cost of power, the availability of land, access to water. These fundamentals matter far more than any tax break.