Will rupee, bonds need RBI intervention after India Budget 2026?

After the Union Budget 2026-27 laid out a record borrowing plan and a shift in fiscal anchoring, financial markets are bracing for a familiar question: will the Reserve Bank of India (RBI) need to step in more decisively to steady the rupee and cap bond yields?

The answer, going by market signals and policymakers’ guarded remarks, is that intervention—both in the foreign exchange and bond markets—may not just continue but intensify in the near term.

Borrowing push, yield pressure

The government has pegged gross market borrowing for FY27 at a record Rs 17.20 lakh crore, higher than many in the market had pencilled in. Net borrowing is seen at Rs 11.73 lakh crore. While the fiscal deficit is projected at 4.3 per cent of GDP and the Centre has shifted to a debt-to-GDP target of 55.6 per cent, traders worry about supply-demand imbalances in government securities.

The 10-year benchmark yield has already been inching up in recent weeks, even after the RBI cut the repo rate by 125 basis points since 2025. The disconnect between policy rate cuts and elevated long-term yields has kept borrowing costs sticky for both the Centre and states.

In her first post-Budget interview with News18, Finance Minister Nirmala Sitharaman acknowledged the concern without signalling alarm.

“We are very conscious that yields are going up again… It is dependent on so many different factors,” she said, adding that while market borrowing is essential to fund developmental activity, rising yields can deter states from tapping markets at higher costs.

“It’s a very evolving situation. We’ll have to see how it goes,” she said, stopping short of calling for specific RBI action.

Economists, however, believe the central bank may have little choice but to remain an active participant.

Vivek Kumar of QuantEco Research said the RBI’s open market operations (OMOs) are already linked to its foreign exchange interventions. “The OMO purchases from the RBI are a consequence of its dollar sale activity—FX sterilisation—currently being undertaken to curb the pace of INR depreciation,” he said.

With global uncertainty keeping capital flows subdued, Kumar expects the RBI to remain active in the FX market, opening the door for further sterilisation via bond purchases. He added that the central bank could even consider extending OMOs to state development loans (SDLs), as it did during the COVID-19 phase, or revive “Operation Twist” to manage the yield curve more effectively.

Rupee under strain

The rupee, meanwhile, has been on a weak footing. It has lost nearly 10 per cent against the dollar over the past year and is hovering near record lows, pressured by a strong dollar, rising US yields and patchy portfolio flows.

Asked whether she was comfortable with the currency’s trajectory, Sitharaman said, “our party was, and is, in favour of always a strong rupee, no doubt. But it’s also got to be predicated in the context of how the economy is,” emphasising that India’s macroeconomic fundamentals remain strong.

“I’m not indifferent to the rupee-dollar exchange rate… The Reserve Bank is closely monitoring,” she added, before declining to characterise her stance as either “comfortable” or “not comfortable”.

Vivek Iyer, Partner and Financial Services and Risk Advisory Leader at Grant Thornton Bharat, attributed the rupee’s depreciation largely to external factors.

“Rupee depreciation is a function of uncertain US policy and the corresponding impact on all dollar currency pairs,” he said. To ensure RBI interventions remain effective, “dollar liquidity would need to be boosted.”

He sees three possible measures: bilateral foreign exchange swap lines with other countries, mobilisation of NRI deposits at attractive rates, and a gradual reduction in the share of dollar assets in reserves with gold replacing the greenback. “This trend will be accelerated in the medium to long term,” he said.

Notably, India’s holdings of US Treasuries have fallen sharply from their 2023 peak, while gold reserves have increased. Sitharaman framed this as part of a broader global trend. “Many central banks… are pitching to buy more gold, and India seems to be following the trend,” she said, linking the surge in gold prices to global uncertainty that pushes investors toward “time-proven” assets.

Global cues and the Trump factor

External developments could, however, offer some relief. On Monday, US President Donald Trump announced that he had agreed to a trade deal with India. Prime Minister Narendra Modi, in a post on X, said “Made in India” products would now face a reduced tariff of 18 per cent in the US, calling it a boost for 1.4 billion Indians.

If the agreement translates into stronger export prospects and improved capital flows, it could temper pressure on the rupee and ease some concerns in the bond market. Yet much will depend on the fine print and the broader trajectory of US monetary policy, especially with US Treasury yields firming up.

RBI in the spotlight

For now, the RBI faces a delicate balancing act. On one hand, it must ensure that heavy government borrowing does not crowd out private investment or push yields to levels that impair growth. On the other, it may manage currency volatility in a world marked by dollar strength and fragile capital flows.

Kumar cautions that while intervention may be necessary, market forces must also reflect underlying fiscal realities, especially at the sub-national level where heavy issuance of SDLs has added to supply pressures.

Iyer, meanwhile, does not expect further rate cuts in the immediate term. “We don’t expect interest rates to change given that we need to keep yields on rupee-denominated assets anchored for some time as we build our FX reserves further,” he said.

In effect, the post-Budget landscape leaves both the rupee and government bonds vulnerable to global cross-currents and domestic supply pressures. Whether through OMOs, FX swaps, liquidity operations or calibrated communication, the RBI is likely to remain the marginal stabiliser in the system.

The coming monetary policy decision will, therefore, be less about headline rate moves and more about how far the central bank is willing to go to defend the currency and anchor the yield curve in the face of record borrowing and an uncertain world.