RBI urges states to diversify borrowings across different tenures

The Reserve Bank of India (RBI) has advised state governments to spread their borrowings across different maturities instead of concentrating heavily on long-term bonds, while also urging them to provide clearer communication on their fundraising plans. For fiscal year 2026, states are expected to borrow a record Rs12 trillion ($135.9 billion). The surge in demand for long-term borrowings has already pushed up yields on state bonds by 30–60 basis points this year, adding volatility to the debt market.

According to information, in recent auctions, cut-off yields for longer-duration bonds have risen by nearly 50 basis points, reflecting weak demand from banks and limited appetite from long-term investors. To ease the pressure, the RBI has asked states to balance their borrowings across the yield curve and adhere as closely as possible to their announced borrowing calendars.

Market participants note that states often deviate significantly from their indicated borrowing schedules, either borrowing much higher or lower than projected. This irregularity creates uncertainty for traders and disrupts market stability. In many cases, states have raised funds by accepting bids at steep rates, causing mark-to-market losses for investors and adding further strain on the bond market.

The central bank has also conveyed concerns from banks that several large lenders are nearing their internal limits for state debt exposure. To improve market liquidity and reduce such risks, the RBI has encouraged states to focus on reissuing existing securities rather than relying solely on fresh bond sales at every auction.

Currently, only a few states opt for reissuance, while most prefer issuing new securities. This practice forces investors, particularly banks, to hold these securities until maturity, reducing exit options and dampening appetite for fresh issuances. By promoting reissuance, the RBI expects to enhance secondary market activity and improve overall liquidity in the state bond market.

(Business Correspondent)