Upside pressures on G-sec yields are mounting. The 10Y Benchmark security 6.48% GS 2035 has surged to 7.08% as on 20th May, 2026. Episodes of risk aversion and volatile foreign portfolio flows could add pressure to domestic yields further.
India’s improved fiscal position over recent years provides greater flexibility to respond to external shocks. Fiscal consolidation, coupled with a higher share of capital expenditure, has strengthened the quality of public spending while creating room for calibrated policy support during periods of geopolitical and macroeconomic stress. In March, the government approved an additional gross expenditure of Rs 2.81 lakh crore, including for an economic stabilisation fund to shield against external shocks.
The central government has focused on improving the fiscal situation over the past few years. Lower fiscal deficit has created space for the government to act during exigencies. The fiscal deficit is budgeted to reduce to 4.3% of GDP in fiscal 2027 from 9.2% of GDP in fiscal 2021. The central government has met its fiscal deficit targets after the Covid-19 pandemic.
Improved quality of spending brings resilience to growth: The quality of spending has improved relative to the pre-pandemic period, with the budgetary capital expenditure rising an average of 18.9% per year between fiscals 2021 and 2027, compared with 10% in the five years preceding the pandemic. The reduction in the fiscal deficit has been through moderating revenue spending.
A long-drawn conflict increases the risks to the
fiscal deficit from the expenditure and revenue sides. Measures such as fuel
excise duty cuts could result in revenue loss, while the need for to support
the economy will lead to increased expenditure by the government.
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