India Grapples With Rising Borrowing Costs as Bond Yields Surge

India is facing renewed pressure on its public finances as rising long-term bond yields push up the cost of borrowing for the government. Finance Minister Nirmala Sitharaman recently acknowledged the challenge, warning that despite the Reserve Bank of India maintaining relatively low policy rates, a sudden spike in yields has made borrowing “significantly more expensive.”

At the heart of the issue is a combination of global and domestic factors. Investors worldwide have been shifting away from emerging market debt due to stronger returns on U.S. Treasuries, where yields have climbed on expectations of prolonged higher interest rates. In India, concerns about fiscal slippage, large borrowing needs, and higher inflation have compounded the problem. The yield on the benchmark 10-year government bond has jumped to its highest level in more than a year, forcing the government to pay a premium on new debt issuance.

India’s fiscal deficit target of 5.1% of GDP for the 2025–26 financial year is now under strain. The government has committed to a large spending program that includes infrastructure investment, subsidies, and social support schemes ahead of upcoming state elections. Rising borrowing costs mean that a larger share of government revenue will go toward servicing debt, leaving less room for productive expenditure. Economists warn that unless yields stabilize, the government may have to make difficult choices, either cutting back on planned projects or finding new revenue streams through taxes or asset sales.

The market reaction has also spilled over into the corporate sector. Higher government bond yields often translate into higher lending rates for companies and households, which could slow investment and dampen consumer spending. Indian banks, already balancing tighter liquidity conditions, are likely to pass on higher costs to borrowers, raising concerns about growth momentum in Asia’s third-largest economy.

Despite the challenges, officials remain optimistic about India’s fundamentals. The Finance Ministry has emphasized that growth remains strong, supported by robust domestic demand, manufacturing expansion, and an ongoing infrastructure push. Foreign direct investment inflows have also held steady, suggesting that long-term investor confidence in India remains intact.

Analysts say the government could explore measures such as increasing issuance of shorter-term bonds, engaging more with foreign investors, or using central bank tools to help stabilize yields. The Reserve Bank of India, however, has so far avoided direct intervention, preferring to allow markets to adjust naturally.

For now, the surge in borrowing costs underscores the fine line India must walk as it seeks to balance fiscal discipline with ambitious development goals. The coming months will test whether policymakers can manage the pressures without derailing the country’s growth trajectory or unsettling financial markets further.