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Informist, Wednesday, Sept. 3, 2025

 

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--Fin min source: Need nuanced view on H2 borrow, eager for mkt feedback
--Fin min source: Rise in long-term bond supply dictated by investor demands
--Fin min source:Open to cutting long-term bond supply share H2 if mkt wants
--Fin min source: Borrowing costs so far FY26 about 40 bps lower than FY25
--Fin min source: Keen to streamline borrowing, avoid "knee-jerk" reactions
--Fin min source: Bond traders contacted fin min after recent rise in yields
--Fin min source: Sought to allay bond market concerns on fiscal slippage
--Fin min source: To take call on H2 borrow noting redemptions in coming yrs
--Fin min source: Avoided using T-bills to fund fiscal deficit in last 2 yrs
--Fin min source: Not keen to change borrowing calendar pattern immediately

 

By Aaryan Khanna

 

NEW DELHI – The government will have to take a nuanced view on its Oct-Mar borrowing programme and is eager for market feedback, a finance ministry official told Informist. The Reserve Bank of India is meeting treasury officials from banks this week to discuss the calendar for the second half of the fiscal year ending Mar. 31. The calendar is likely to be released towards the end of this month.

 

Market participants are likely to ask the central bank, the government's debt manager, to reduce the share of supply of bonds maturing in 30-50 years in Oct-Mar. In Apr-Sept, the borrowing calendar brought down the share to 35.0% of the INR-8.00-trillion issuance, though that was at the higher end of the market expectation. In the same period a year ago, the government had pegged 37.3% of the issuance through 30-50 year bonds and in Oct-Mar, the long-term bond share was 38.6% of the supply.

 

So far, the supply in Apr-Sept has overwhelmed the market, driving up long-term bond yields at a time when the rate cut cycle by the RBI's Monetary Policy Committee is seen at or near an end. Demand from long-term investors has died down following various changes in regulations over the last few years.

 

"I agree the long-term borrowing could be lower by 2-3%, but the current level and the increase has also been dictated by investors' preference over the last few years," the official said. "And I don't understand if a difference of 20,000 or 25,000 crores (INR 200 billion-INR 250 billion) over a six month calendar (in Apr-Sept) is what is reshaping the market right now."

 

The 10-year gilt yield rose around 20 basis points in August, while the 40-year benchmark yield was up over 30 bps. Despite the rise, the government's borrowing cost so far in 2025-26 (Apr-Mar) was running around 40 bps lower than FY25, the official said. Last year's borrowing cost had eased 28 bps on year to 6.96%. The weighted average maturity of gilts raised in FY25 was 20.65 years, the highest since at least FY11.

 

Even after the recent rise in yields, the government is comfortable borrowing in a steep yield curve provided it is not distorted, the official said. Issuing a 50-year bond at 150-170 bps spread over the repo rate is not a problem at a time when the government is keeping its fiscal deficit in check, and inflation is broadly expected to align with the RBI's medium-term target of 4%. The finance ministry aims to streamline its borrowing programme and make it as predictable as possible, and does not feel the need to take actions that may be read as a "knee-jerk" reaction by bond investors.

 

"We have gotten some calls about the rise in the yields and about fiscal concerns in general," the official said. "We have tried to tell the market that these concerns are overblown. Look at what we have done: we have bought back 87,000 crore (INR 870 billion) of bonds that was not in the Budget."

 

Concerns of supply greater than the current gross borrowing of INR 14.82 trillion for FY26 have surfaced as the government's tax collections up till July-end have been modest and Prime Minister Narendra Modi announced a goods and services tax rate rationalisation on Independence Day, which is seen hurting the Centre's revenues. The tax changes seem to be imminent, with the GST Council in a two-day meeting starting Wednesday is expected to decide on a two-slab GST rate structure approved by a Group of Ministers in August.

 

If the market does bat for bringing down the supply of long-dated securities, the finance ministry will also seek inputs on where it could allocate the supply. It had internal concerns about sharply increasing the share of bonds maturing below seven years due to the large redemptions in the coming years, the official said. The rise in short-term bond yields has also surprised the government. Despite ramping up gilt switches and buybacks in the last two fiscals, the government still has to repay INR 5.5 trillion worth of gilts in FY27. These repayments peak at above INR 8 trillion by FY31.

 

 

Some bond market participants are likely to suggest that the long-term supply be done through short-term borrowing, where outstanding stock has remained stagnant over the last three years, dealers said. In FY25, the government brought down its outstanding Treasury bills by INR 1.2 trillion and is running a net-negative supply so far since April against its target of zero net issuance. The finance ministry official said shifting the supply to treasury bills would be antithetical to the recent thought process within the ministry. The government has aimed to avoid funding the fiscal deficit through T-bills, instead only using the instruments to meet short-term cash mismatches. 

 

"It is more of an issue of thought process, and this is where the nuance comes in," the official said. "I don't see a problem with refinancing the T-bills necessarily even one year from now, especially if the RBI chooses to cut the repo rate once more."

 

Reacting to calls to change the revamped gilt issuance pattern from earlier this year, the official said the government was not in favour of changing the pattern in a hurry. The borrowing calendar in Apr-Sept introduced a pattern of one bond being featured only once every four weeks and only two bonds being issued per auction. The government has raised 45.48% of its full-year gross borrowing aim through this mode.

 

"The same sections of the market had asked us six months ago to do the auctions once a month so they could engage in market-making activities, instead of supplying the bond once every two weeks," the official said. "Now that the strategy is leading to losses for them, they want the government to change on a whim."

 

Traders attributed the extended illiquidity in the 10-year 6.33%, 2035 bond after its introduction to the once-a-month issuance pattern, which also delayed its acceptance as the market's benchmark. Its yield to maturity is also much lower than erstwhile 10-year benchmarks, creating a larger-than-usual "kink" in the government bond yield curve.  End

 

Edited by Akul Nishant Akhoury

 

 

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