The Finance Ministry’s decision to slash fuel excise taxes might have given India’s oil companies some breathing room, but it has negatively affected another corner of the economy: the government bond market.
Indian government bonds fell sharply on Friday morning, with the benchmark 6.48 per cent bond maturing in 2035 seeing its yield spike to 6.9523 per cent, its highest level since July 2024, before settling at 6.9256 per cent. Bond yields and prices move in opposite directions, so a rising yield means investors are demanding more returns to hold government debt. This also means that they are less confident about the country’s fiscal health.
The Centre’s decision to cut special additional excise duty on petrol from ₹13 to ₹3 per litre and to scrap the ₹10 levy on diesel entirely. It helps state-run oil firms. It delays any immediate price hikes for the consumer. It sounds good.
But the excise cuts, as per some industry estimates, are likely to cost the exchequer somewhere between ₹1.5 lakh crore and ₹1.6 lakh crore in fiscal year 2027 alone. If that happens, it burns a significant hole in the government’s budget, especially at a time when the Centre is already trying to rein in the fiscal deficit.
How this works
Excise cut announced → Centre collects less tax revenue (estimated ₹1.5–1.6 lakh crore less in FY2027)
Less revenue → Centre needs to borrow more to meet its spending commitments
More borrowing → More bonds flooding the market
More supply of bonds → Prices fall, yields rise
Higher yields → Every new rupee the Centre borrows becomes more expensive
India, the world’s third-largest crude importer, is already exposed to the Middle East crisis. Rising oil prices could worsen the nation’s current account deficit further and stoke domestic inflation.
This fiscal, Indian states have already used bond sales to raise more than ₹12 lakh crore as of March 26, 2026. And traders seem to have read into it all: heavy debt supply, fiscal uncertainty, high global rates, leading to bond market anxiety.