Budget financing strategy pushing bond yields higher, says Axis Bank's Neelkanth Mishra

Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, said the Union Budget’s biggest problem is not spending or fiscal discipline but the way the government has planned to finance its deficit, which is unintentionally putting pressure on the bond market.

Despite a fiscally cautious Budget, Mishra said bond yields have moved in the wrong direction. “The 10-year bond yields have now gone up to 6.76%,” he said, adding that with such discipline, yields should be closer to 6%.

According to Mishra, this is happening because the government has made very conservative assumptions on growth and revenues, and more importantly, on inflows from small savings schemes.

He stated that collections under small savings have risen sharply during the current year, but the Budget assumes much lower inflows ahead. “This means that you’re expecting ₹1 lakh crore, ₹1.2 lakh crore less… than what you’re likely to get,” Mishra said.

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Because of this underestimation, the government has announced a higher gross borrowing programme than what may actually be needed. That, he said, is unsettling the bond market and pushing yields up.

Mishra said this outcome is particularly ironic because the Budget itself is otherwise well designed. “The headline thought is that it was completely predictable, and I think that’s a good thing,” he said, explaining that stability and lack of surprises help businesses and investors plan better.

He also praised the government for avoiding wasteful spending and for staying focused on fiscal consolidation, which should normally help keep borrowing costs low.

However, he flagged another important factor adding to the pressure on yields — the government’s large cash balances. He said government cash parked with the system typically stays in the range of ₹2.5–3 lakh crore, which effectively drains liquidity from banks.

“Despite the fiscal discipline of the government, the 10-year yields are actually going up. That’s something that needs to be addressed,” Mishra said.

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He described this as an operational issue that needs to be resolved jointly by the government and the Reserve Bank of India.

Mishra warned that if bond yields remain elevated, the impact will go beyond the bond market. He said the economy still has slack and needs support to close the output gap. Since the government is rightly cutting back on fiscal stimulus, the burden shifts to monetary policy.

If interest rates do not come down meaningfully, he said, the recovery will take longer. “It’ll take much longer to close that ga,p and therefore there is definitely an impact,” he cautioned, adding that this may already be visible in the recent weakness seen in banking stocks.

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On the Budget’s proposals related to data centres, Mishra said these measures should be seen mainly as an enabling step. He explained that the tax changes are meant to allow global companies operating in India to serve other regions as well, without facing adverse tax treatment because of data localisation rules.

However, he said large investments in data centres will ultimately depend far more on practical factors such as the cost of power, land and water, rather than on tax incentives alone.

For the entire interview, watch the accompanying video

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