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Informist, Tuesday, Mar. 25, 2025

 

By Cassandra Carvalho and Aaryan Khanna

 

MUMBAI – With the last scheduled auction in the books, even a record supply on Tuesday could not help states fulfill the massive amount indicated in the calendar for Jan-Mar. On a cumulative basis, they raised INR 4.34 trillion through bonds in the quarter, missing the indicated amount by nearly INR 400 billion.

 

On Tuesday, 21 states raised INR 722.55 billion through bonds at a record debt sale. While the amount was slightly less than the notified amount, it was well above the indicated INR 540.65 billion in the calendar for this week. This brought states' total borrowing in 2024-25 (Apr-Mar) to INR 10.73 trillion, in line with what analysts and market participants had forecast for the financial year.

 

Bond traders had feared a repeat of last year, where states were within touching distance of the INR 4.13 trillion calendar for the March quarter – hitting 97.5% of the indicated amount by including an extra auction apart from the scheduled ones on Tuesdays. In FY25, that scaled down, but as usual, states' borrowing was concentrated in the last quarter of the fiscal. They raised 40.5% of the full year amount in Jan-Mar, compared with a meagre 13.6% in the June quarter.

 

This had led to the spread of the 10-year state bond yield over the 10-year benchmark gilt yield to rise to nearly 60 basis points in early March, with an auction cut-off rising to as high as 7.34%. These spreads were the highest since early 2022. This, after the Reserve Bank of India's Monetary Policy Committee cut the policy repo rate for the first time in nearly five years to 6.25% in February, a benefit that did not pass on to bond yields due to tight liquidity. 

 

"Unfortunately, the state borrowing plan is always slightly skewed where you have the bulk of the borrowing in the last quarter, so that sort of distorts the yield slightly," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank. "If it (states' borrowing programme) is better planned and spread out through the year I think it will help them (states) reduce their cost of borrowing."

 

Another pain point was that gilt auctions, which usually end in the first half of February, stretched to the end of the month. This had also turned long-term investors' demand towards the Centre's bond issuances, and led to a later pickup for state bonds, dealers said. This was especially painful in February, when demand from life insurers was a low due to muted sales of corresponding insurance policies. 

 

However, the appetite for state bonds was relatively robust due to banks ramping up in their buys with the RBI help. The central bank bought gilts worth INR 2.45 trillion in the quarter at auction since Jan. 30, with another INR 388.15 billion worth of gilt buys in the secondary market in January. States also pivoted to issuing bonds maturing below 10 years, which better suited the asset-liability management needs for lenders.

 

As gilt yields have fallen, banks have rushed to replace the gilts sold to the RBI from their held-to-maturity portfolios with higher-yielding state bonds to raise the weighted average yield of their portfolios nearing the year-end. Two large state-owned banks are said to have increased their state bond holdings in the past week itself, dealers said.

 

"We prefer state bonds because now since G-sec yields are falling, so to replace all the HTM stock, we need high yields and state bonds are perfect for that," the chief dealer at a state-owned bank said. "Our portfolio weighted average yield should be above 6.60% at least."

 

Ultimately, this led to spreads cooling to as low as 37 bps on Tuesday, despite the record bond auction. Traders have a view these spreads will compress further in FY26. Citing precedent, traders are betting on a light borrowing programme by states in Apr-Jun. This has come on top of aggressive positioning on at least two more cuts by the RBI's MPC in 2025, likely in April and June, aiding the expected fall in state bond yields.  End

 

Edited by Akul Nishant Akhoury

 

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