The yields on Indian government bonds rose on Monday after the announcement of an increased borrowing program than expected by state governments. This raised concerns about the supply pressure in the domestic bond market.
The yield on the 10-year bond increased by four basis points, to 6.65%. The yield on the 2035 bond, which had a yield of 6.33%, rose by five basis points, to 6.66%. This reflects investor caution in the face of heavy issuance.
The Reserve Bank of India revealed that states plan to borrow $55.4 billion (5 trillion rupees) in the quarter of January-March, a significant amount above the 4.5 trillion rupies forecast by Bank of America Corp.
The amount of borrowing that the Indian state will be able to raise in the next three months is almost double the amount raised the previous three month. This is the highest quarterly borrowing by Indian states.
Supply surges despite weak demand
The rise in state borrowings comes at a moment when traditional investors are not as active.
Insurers have reduced their bond purchases because of lower sales of guaranteed return products. Pension funds have also shifted their allocations to equities.
Gopal Tripathi is the head of treasury for Jana Small Finance Bank. He noted that “the impact of higher state borrowings on a wider spread between state and central government bond from their current elevated levels.”
Despite the heavy borrowing schedule in 2025, the benchmark government yields only dipped slightly, by less that 20 basis points. This was due to concerns about supply and weak investor demands, which offset the impact of four rate cuts on repo and the record central bank interventions.
The RBI conducted open market operations, cash injections through forex swaps and reductions in cash reserve ratios, resulting in aggregate inflows totaling 11.7 trillion rupees.
Sagar Shah, the head of domestic markets for RBL Bank Ltd. said that “the RBI’s OMOs provide support and we could see more bond purchases beyond January.” I don’t think the 6.7% level will be breached immediately.
Benchmark yields & Market Expectations
Traders expect that the yield will fluctuate between 6.56%-6.65%, with a focus on the absorption and impact of foreign capital flow.
Foreign investors were net sellers on the domestic bond markets, selling more than 123 billion rupies of index-linked bonds last December, which was a record.
The rupee’s depreciation versus the US dollar was a major factor in the selling, which highlighted the currency risks for foreign holders.
Yifei ding, senior portfolio manager of Invesco, stated, “Currency impacts aside, we see good values in rupee bonds, as yields have largely been stable.” This indicates that some investors still view Indian government securities as a play for the long-term despite near-term fluctuations.
Investors will be watching closely the next three months, as the unprecedented state borrowing program could test the market’s capacity to absorb supply.
The issuance will also push India’s annual sales of debt to a new record high, underscoring state governments’ growing fiscal needs.
Investors will be watching closely how the market absorbs this record issuance.
This post Indian bond rates rise as states announce record Rs5T borrow plan may be modified based on updates.
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