Indian government bond yields rose on Monday following the announcement of a larger-than-expected borrowing program by state governments, raising concerns about supply pressure in the domestic debt market.
The 10-year yield climbed four basis points to 6.65%, while the yield on the 6.33% 2035 bond rose five basis points to 6.66%, reflecting investor caution amid heavy issuance.
The Reserve Bank of India (RBI) disclosed that states plan to borrow 5 trillion rupees ($55.4 billion) in the January-March quarter, significantly above the 4.5 trillion rupees forecast by Bank of America Corp.
The scheduled issuance is nearly double the amount raised in the previous three months, marking the highest quarterly borrowing ever by Indian states.
Supply surge amid weak demand
The surge in state borrowing comes at a time of subdued demand from traditional investors.
Pension funds have been shifting allocations toward equities, while insurers have reduced bond purchases due to lower sales of guaranteed-return products.
Gopal Tripathi, head of treasury at Jana Small Finance Bank, noted, “The impact of the higher state borrowings will be felt on a widening of spreads between state and central government bonds from their already elevated levels.”
Despite the heavy borrowing schedule, benchmark government yields dipped only slightly in 2025, by less than 20 basis points, as concerns over supply and weak investor demand countered the impact of four repo rate cuts and record central bank interventions.
The RBI conducted significant open market operations (OMOs), cash injections via forex swaps, and reductions in the cash reserve ratio, leading to aggregate inflows of 11.7 trillion rupees.
Sagar Shah, head of domestic markets at RBL Bank Ltd., said, “The RBI’s OMOs are providing support, and we could see even more bond purchases beyond January. I don’t see the 6.7% level being immediately breached.”
Benchmark yields and market expectations
Traders expect the yield to fluctuate within a 6.56%–6.65% range, with focus on the absorption of the large supply and the impact of foreign capital flows.
Foreign investors have been net sellers in the domestic bond market, offloading more than 123 billion rupees of index-linked bonds in December, a record high.
Much of the selling was attributed to the rupee’s depreciation against the US dollar, highlighting currency-linked risks for foreign holders of Indian debt.
Yifei Ding, senior portfolio manager at Invesco, said, “Currency impact aside, we see good value in rupee bonds as yields have been largely stable,” indicating that some investors continue to view Indian government securities as a long-term play despite near-term volatility.
The upcoming three months will be closely watched by investors, as the unprecedented state borrowing schedule could test market capacity to absorb supply.
The issuance is also expected to push India’s annual debt sales to a record high, underscoring the growing fiscal needs of state governments.
With state governments set to borrow 5 trillion rupees, the domestic debt market is entering a period of high supply pressure, and investors will be closely watching how the market absorbs the record issuance.
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