Fixed income in focus ahead of Budget 2026: why bonds are back on investors’ radar

The renewed focus on fixed-income markets, particularly ahead of Budget 2026, signals a critical juncture for India's financial landscape. Fixed-income instruments, such as government securities (G-Secs) and corporate bonds, represent debt issued by governments and corporations to raise capital. Investors receive regular interest payments and the return of their principal at maturity. Historically, fixed income provides stability and predictable returns, making it a crucial component of a diversified portfolio, especially during periods of economic uncertainty.

**Background Context:** For a long time, fixed-income markets in India faced challenges due to elevated inflation, which eroded real returns, and significant government borrowing that often led to higher yields. The Reserve Bank of India (RBI) had to balance growth with inflation control, often resulting in fluctuating interest rate environments. However, the post-pandemic period saw concerted efforts towards fiscal consolidation by the government, alongside a more predictable monetary policy stance by the RBI aimed at managing inflation within its target band of 2-6%. This backdrop has set the stage for bonds to become more attractive.

**What Happened and Why Now:** Several factors are converging to put fixed income back on investors' radar. Firstly, **fiscal consolidation efforts** by the Indian government are paramount. The government's commitment to reducing the fiscal deficit, as outlined in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, and subsequent targets (e.g., aiming for 4.5% of GDP by FY26), instills confidence. A lower deficit implies reduced government borrowing, which can lead to lower interest rates and less crowding out of private investment. Secondly, **stable sovereign yields** are a major draw. The RBI's calibrated approach to monetary policy, combined with the government's borrowing calendar, has helped maintain relative stability in G-Sec yields, making them more predictable for investors. Thirdly, **global rate volatility** makes India's relatively stable environment appealing. While major central banks globally have been aggressive with rate hikes, India's economic resilience and policy management offer a haven. Lastly, and perhaps most significantly, the **potential inclusion of Indian government bonds in global bond indices** is a game-changer. JPMorgan Chase & Co. announced in September 2023 that Indian government bonds would be included in its Government Bond Index – Emerging Markets (GBI-EM) Global Index suite, effective June 2024. This inclusion is expected to attract significant foreign institutional investor (FII) inflows, estimated to be between $20-40 billion, into the Indian debt market.

**Key Stakeholders Involved:** The primary stakeholders are the **Government of India (Ministry of Finance)**, which issues G-Secs to fund its expenditure and sets fiscal policy, including deficit targets. The **Reserve Bank of India (RBI)**, as the central bank, manages monetary policy, conducts open market operations to influence liquidity and yields, and acts as the government's debt manager. **Domestic investors** (banks, insurance companies, provident funds, mutual funds) are major buyers of G-Secs, fulfilling their statutory liquidity ratio (SLR) requirements and investment mandates. **Foreign Institutional Investors (FIIs)** are becoming increasingly important, especially with bond index inclusion, bringing in crucial foreign capital. Lastly, **corporations** issue bonds to raise capital for expansion, and their borrowing costs are influenced by the broader fixed-income market trends.

**Significance for India:** The renewed interest in fixed income holds immense significance for India. Lower and stable borrowing costs for the government translate into more fiscal space, allowing for increased spending on infrastructure, social welfare, and other developmental projects without escalating debt. For corporations, it means cheaper access to capital, spurring investment, job creation, and economic growth. The influx of FIIs due to bond index inclusion will boost foreign exchange reserves, strengthen the rupee, and deepen India's financial markets, enhancing its global financial integration. This also signals growing international confidence in India's macroeconomic stability and growth trajectory.

**Historical Context and Constitutional References:** The journey towards fiscal discipline in India gained formal structure with the **Fiscal Responsibility and Budget Management (FRBM) Act, 2003**. This Act aimed to institutionalize financial prudence, setting targets for fiscal and revenue deficits. While initially targets were missed, subsequent amendments and the recommendations of the N.K. Singh Committee (2017) reinforced the commitment to long-term fiscal sustainability. The Union Budget, presented annually under **Article 112 of the Constitution** (Annual Financial Statement), is the primary document outlining the government's fiscal policy and borrowing program. **Articles 292 and 293** deal with the borrowing powers of the Union and State governments, respectively. The RBI derives its powers for monetary policy and debt management from the **Reserve Bank of India Act, 1934**.

**Future Implications:** The upcoming Budget 2026 will be crucial in affirming the government's fiscal consolidation path. Any deviation could impact investor sentiment. The success of bond index inclusion in attracting and retaining FIIs will be closely watched, as will global interest rate movements, particularly by the US Federal Reserve, which can influence capital flows to emerging markets. A robust and deep fixed-income market is essential for India's ambition to become a $5 trillion economy, providing stable funding sources for both public and private sectors and enhancing overall financial stability. This trend underscores India's maturing financial markets and its growing appeal as an investment destination.