A budget announces a fiscal deficit. It does not explain how the money actually arrives. That is the job of a document like this one, and it is where a set of otherwise abstract concepts become concrete.
On 25 September 2026, the Government of India, in consultation with the Reserve Bank of India, announced it will borrow ₹7,86,000 crore in the second half of FY 2026-27, including ₹15,000 crore of Sovereign Green Bonds. For the full year, market borrowing through dated securities is expected to be ₹15,99,506 crore, against Budget Estimates of ₹17,20,000 crore.
That last comparison is the most informative line in the release, and we will come to why.
What the fiscal deficit actually is
The fiscal deficit is the gap between the government's total expenditure and its total receipts excluding borrowings. It is not a debt in itself; it is the amount that must be borrowed this year, and it therefore adds to the outstanding stock of public debt.
The government borrows that money mainly from the market, by issuing securities that investors buy. The Reserve Bank of India acts as the government's debt manager — it conducts the auctions, maintains the accounts and advises on timing and structure — but it does not, in the ordinary course, lend the money itself. That distinction matters: a central bank that directly financed the deficit by creating money would be monetising it, which is inflationary and which India's fiscal framework is designed to avoid.
The instruments fall into two families, and the division is by maturity.
Dated securities, or government securities (G-secs), are long-term. They pay a coupon — periodic interest — and repay the principal at maturity. This borrowing plan spreads them across tenors of 3, 5, 7, 10, 15, 30, 40 and 50 years.
Treasury bills are short-term, with maturities of 91, 182 and 364 days. They pay no interest. They are issued at a discount to face value and redeemed at face value, and the difference is the investor's return. In the third quarter of FY 2026-27 the government expects to borrow ₹23,000 crore per week across 13 auction weeks through T-Bills — ₹8,000 crore in 91-day, ₹8,000 crore in 182-day and ₹7,000 crore in 364-day bills.
Reading the maturity distribution
The tenor split is given precisely, and it is worth reading rather than skimming: 3-year 6.9 per cent, 5-year 12.1 per cent, 7-year 9.1 per cent, 10-year 26.3 per cent, 15-year 17.6 per cent, 30-year 9.2 per cent, 40-year 8.9 per cent and 50-year 9.9 per cent.
Two things follow.
The 10-year security carries the largest single share at over a quarter. That is deliberate and not only about funding. The 10-year G-sec yield is the benchmark risk-free rate for the entire Indian financial system — corporate bonds, bank lending rates and asset valuations are priced off it. A liquid, frequently issued 10-year bond gives the market a reliable reference point, and maintaining that liquidity is a public good the debt manager supplies.
Nearly 46 per cent of issuance is at 15 years or longer, including a 50-year bond. The reason is rollover risk. Debt must be repaid when it matures, and if a large volume matures in the same year the government must refinance it all at once — at whatever interest rate happens to prevail, possibly in a crisis. Borrowing long spreads redemptions out and reduces the frequency of that exposure. The cost is that long bonds usually carry higher yields, so the government pays more interest to buy that safety. Managing this trade-off is the core of public debt management.
Who buys 40-year and 50-year paper? Overwhelmingly insurers and pension funds, which have liabilities stretching decades ahead and need assets whose maturities match them. The existence of ultra-long government bonds is as much a response to that demand as a financing choice.
Three technical devices
The release names three instruments that appear in examinations and are rarely explained.
The greenshoe option lets the government retain up to ₹2,000 crore of additional subscription against each security in an auction, beyond the notified amount. It is borrowed from equity-market practice, and its function is to let the issuer take advantage of unexpectedly strong demand without having to announce a fresh auction. If bidding is weak, the option simply goes unused.
Switching and buyback are liability management operations. In a switch, the government exchanges a security maturing soon for one maturing later, with the holder's agreement. In a buyback, it repurchases a security before maturity. Both exist to smoothen the redemption profile — to flatten years in which an unusually large amount would otherwise fall due. Neither reduces the total debt; they redistribute when it must be repaid.
Ways and Means Advances (WMA) is the one most often misunderstood, and the misunderstanding is worth correcting directly. The RBI has fixed the WMA limit for H2 of FY 2026-27 at ₹50,000 crore. WMA is not deficit financing. It is a short-term overdraft facility that covers temporary mismatches between the government's receipts and payments — a week in which salaries fall due before tax collections arrive. It must be repaid within the financial year, it is capped, and using it beyond the limit puts the government into overdraft, which triggers its own consequences. A question that describes WMA as a way of funding the fiscal deficit is testing exactly this confusion.
Sovereign Green Bonds, at ₹15,000 crore of the H2 programme, are ordinary government securities whose proceeds are earmarked for projects with environmental benefits under a published framework. The credit risk is identical to any other G-sec, since the borrower is the same sovereign; what differs is the use-of-proceeds commitment and the reporting that accompanies it. The reforms opening this market to foreign investors are covered in our explainer on G-sec and FPI reforms.
Borrowing below the Budget Estimate
Now the line worth noticing. Full-year market borrowing through dated securities is expected at ₹15,99,506 crore against Budget Estimates of ₹17,20,000 crore — roughly ₹1.2 lakh crore less than budgeted.
Borrowing below the estimate can arise from several causes, and an honest answer lists them rather than asserting one. Receipts may have exceeded expectations, through stronger tax collections or a larger-than-budgeted RBI dividend. Expenditure may have run below the budgeted path, which is common where capital spending is slow to execute. Or the financing mix may have shifted towards small savings collections, which fund part of the deficit outside the market-borrowing programme — a substitution that changes where the money comes from without changing the deficit.
Why it matters is crowding out. Government borrowing competes with private borrowers for the same pool of savings. Heavy government issuance can push up yields, raising the cost of capital for firms; borrowing less than expected eases that pressure and is generally read positively by the bond market. Whether crowding out is significant at any given moment depends on how much slack there is in the financial system, and it is a question on which economists genuinely differ.
The constitutional and institutional frame sits alongside: Article 292 empowers the Union to borrow on the security of the Consolidated Fund of India within limits Parliament may fix, and Article 293 governs State borrowing, which requires the Union's consent where a State is indebted to it. The FRBM Act, 2003 sets the fiscal discipline framework, and the division of resources between Union and States runs through the Finance Commission, covered in our piece on the Sixteenth Finance Commission. How the growth number against which all this is measured should be read is set out in our explainer on reading a growth number properly.
🔑 Revision block
- The announcement: 25 September 2026 — Government of India, in consultation with the RBI
- H2 FY 2026-27 borrowing: ₹7,86,000 crore, through 23 weekly auctions
- Includes: ₹15,000 crore of Sovereign Green Bonds
- Full-year market borrowing through dated securities: expected ₹15,99,506 crore against Budget Estimates of ₹17,20,000 crore
- Tenors: 3, 5, 7, 10, 15, 30, 40 and 50 years
- Shares: 3-yr 6.9%, 5-yr 12.1%, 7-yr 9.1%, 10-yr 26.3%, 15-yr 17.6%, 30-yr 9.2%, 40-yr 8.9%, 50-yr 9.9%
- T-Bills, Q3 FY 2026-27: ₹23,000 crore per week over 13 auction weeks — 91-day ₹8,000 crore, 182-day ₹8,000 crore, 364-day ₹7,000 crore
- Dated securities: long-term, pay a coupon, repay principal at maturity
- Treasury bills: 91, 182 and 364 days; pay no interest; issued at a discount and redeemed at face value
- Fiscal deficit: total expenditure minus total receipts excluding borrowings — the amount that must be borrowed this year
- RBI's role: debt manager — conducts auctions and manages the programme; it does not ordinarily lend the money, since that would be monetising the deficit
- Why the 10-year matters: its yield is the benchmark risk-free rate for the financial system
- Why borrow long: reduces rollover risk by spreading redemptions; the cost is a higher yield
- Who buys ultra-long bonds: insurers and pension funds, matching long-dated liabilities
- Greenshoe option: retain up to ₹2,000 crore additional subscription per security beyond the notified amount
- Switch and buyback: liability management to smoothen the redemption profile; they do not reduce total debt
- Ways and Means Advances: RBI facility for temporary cash mismatches, repayable within the year — not deficit financing; H2 limit ₹50,000 crore
- Crowding out: government borrowing competing with private borrowers for the same savings, potentially raising yields
- Constitutional basis: Article 292 (Union borrowing), Article 293 (State borrowing); FRBM Act, 2003
🎯 Practice MCQs
Q1. The Government's borrowing for the second half of FY 2026-27 is: (a) ₹5,86,000 crore (b) ₹15,99,506 crore (c) ₹7,86,000 crore (d) ₹17,20,000 crore
→ (c) — the larger figures are the full-year expectation and the Budget Estimate.
Q2. Treasury bills are issued with maturities of: (a) 91, 182 and 364 days (b) 1, 3 and 5 years (c) 30, 60 and 90 days (d) 6 months and 1 year only
→ (a) — at a discount, with no coupon.
Q3. Ways and Means Advances are best described as: (a) A long-term loan from the RBI to fund capital expenditure (b) A facility covering temporary mismatches between government receipts and payments (c) The principal instrument for financing the fiscal deficit (d) Advances made by the Union to State governments
→ (b) — repayable within the financial year, and capped.
Q4. The greenshoe option in a government securities auction allows the issuer to: (a) Cancel an auction if bids are unsatisfactory (b) Issue securities without RBI involvement (c) Convert dated securities into treasury bills (d) Retain additional subscription beyond the notified amount, up to a specified limit
→ (d) — up to ₹2,000 crore per security here.
Q5. The 10-year government security receives the largest share of issuance partly because: (a) It is the cheapest tenor to issue (b) Its yield is the benchmark risk-free rate for the financial system (c) Only 10-year bonds may be held by foreign investors (d) It is exempt from taxation
→ (b)
Q6. Borrowing at longer maturities primarily reduces: (a) The coupon the government must pay (b) The fiscal deficit (c) Rollover risk, by spreading redemptions over time (d) The rate of inflation
→ (c) — usually at the cost of a higher yield.
Q7. A "switch" operation in government debt management involves: (a) Exchanging a security maturing soon for one maturing later (b) Converting rupee debt into foreign currency debt (c) Transferring debt from the Union to the States (d) Replacing treasury bills with commercial paper
→ (a) — a buyback instead repurchases a security before maturity.
Q8. "Monetising the deficit" refers to: (a) Selling government assets to reduce borrowing (b) Converting deficit financing into foreign currency (c) The central bank directly financing government expenditure by creating money (d) Raising taxes to close the deficit
→ (c) — which is why the RBI acts as debt manager rather than lender.
Q9. Union government borrowing is provided for in: (a) Article 280 (b) Article 292 (c) Article 266 (d) Article 300A
→ (b) — Article 293 governs State borrowing.
Q10. Consider the following statements: 1. Sovereign Green Bonds carry a different credit risk from ordinary government securities. 2. Borrowing less than the Budget Estimate can ease pressure on bond yields. Which is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2
→ (b) — the borrower is the same sovereign; only the use of proceeds differs.
📋 How this gets asked (PYQ pattern)
Public finance is among the highest-yield areas in the CDS and OTA economy section, because the definitions are precise and they recur with almost no variation.
The deficit-definition question is the foundation and the one most often lost. Fiscal deficit is total expenditure minus total receipts excluding borrowings. Revenue deficit is revenue expenditure minus revenue receipts. Primary deficit is the fiscal deficit minus interest payments. Three definitions, and a question that asks which is which can be answered in seconds by a candidate who has learnt them as a set.
The instrument question separates dated securities from treasury bills. Long against short; coupon against discount. The 91-182-364 day trio is asked directly.
The WMA question is the discriminating one on this topic, precisely because the plausible-sounding wrong answer — that it finances the deficit — is what most candidates will choose.
The article question covers Articles 292 and 293, and they are often paired with Article 280 on the Finance Commission and Article 266 on the Consolidated Fund. Learning the public-finance articles together is far more efficient than encountering them one at a time.
For the descriptive paper, the frame that works is that a borrowing calendar is a set of trade-offs made visible: long versus short maturity, cost against rollover risk, and market borrowing against crowding out. An answer that explains why the government issues a 50-year bond at all — matching insurers' liabilities and spreading redemption risk — is demonstrating that it understands debt management as a discipline rather than as a number in a budget speech.
Preparing for CDS or OTA? Public finance rewards learning the definitions exactly once, properly — deficits, instruments and the constitutional articles. Build the base with our CDS/OTA economy notes, follow the daily CDS/OTA current affairs, and prepare with our faculty in the upcoming Cavalier courses in Delhi.
✍️ Written by Hitendra Deswal — Economy & international relations faculty at The Cavalier. Reviewed by the Cavalier Faculty Desk.