Unlike other emerging economies like South Korea, India's government sells bonds entirely to the domestic market, making it more likely that it will crowd out local corporate borrowers looking to raise funds for operations or expansion.

Then there is timing. The government will be keen to avoid a year-end credit squeeze that begins with the October harvest season and festivals like Diwali, which usually falls in October or November.

That means the government will likely hope to limit any market disruptions to a shorter period by packing in most of its extra borrowing by end-September, taking the weekly borrowing requirement to an unprecedented 138 billion rupees ($2.86 billion) over three months and putting upward pressure on bond yields just as the economy appears to be turning the corner.

Higher borrowing costs will spill into the broader economy at least partly because banks are required to invest 24 per cent of their deposits in government debt.

RELUCTANT LENDERS

Even before the government's borrowing plan was announced, banks were reluctant to lower rates. The central bank has cut its main lending rate by 425 basis points since October to spur growth, but state-run banks, the dominant players, have reduced lending rates only by 150-200 basis points in that time.

Benchmark yields have already risen 184 basis points this year on expectations of heavier government borrowing.

Ten-year bond yields are hovering near three-month highs over 7 per cent and on Monday rose 16 basis points after the budget was announced, their biggest one-day rise since late March. Yields built on their gains on Tuesday as concerns of excess government supplies pushed down bond prices.

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