Indian government bond markets are witnessing notable pressure at the long end, with 10-year G-sec yields climbing by nearly 17–20 basis points since July. This move comes despite a supportive backdrop of benign inflation, stable crude prices, steady domestic growth, and no major global headwinds. Contributing factors include the Reserve Bank of India’s (RBI) shift to a neutral policy stance, the discontinuation of open market operations (OMOs), and cautious sentiment around weaker tax receipts—even though both central and state governments retain fiscal space to meet their borrowing and deficit targets. The recent S&P rating upgrade has provided some relief, partially reversing the yield rise.
A significant driver behind widening spreads is the surge in longer-tenor State Development Loan (SDL) issuance. Year-to-date FY26, SDL supply has jumped 37% compared to the previous year, translating to an additional ₹87,000 crore raised. The rise is especially sharp in Q2 FY26, with issuance up 35% year-on-year during July–August. Around 65% of this issuance since July has been concentrated in maturities beyond 15 years—well above the historical 40–50% share. Notably, the 13–15 year and 20–25 year segments now account for nearly half of total supply.
The skew toward longer maturities highlights declining demand for statutory liquidity ratio (SLR) securities from banks, along with weaker interest from long-term investors such as insurers and the National Pension System (NPS), who are increasingly favoring equities. The absence of RBI’s OMO purchases since June has further widened long-end spreads.
On the fiscal front, Q1 FY26 data show a relatively higher deficit among states due to softer receipts and front-loaded capital expenditure. Even so, full-year deficit and borrowing levels are expected to remain within budget, with SDL issuance likely holding near the planned ₹12.4 trillion. However, issuance patterns suggest supply pressures will remain elevated through December 2025.
Currently, spreads in the 5–15-year segment stand higher than their 3–5-year trend. Looking ahead, two key factors could drive moderation in yields:
- A slowdown in growth that may trigger additional easing from the RBI.
- A shift in issuance tenor, which could reduce upward pressure on long-term yields.
By Global FinDesk Research Team