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Informist, Wednesday, Dec. 31, 2025

 

By Aaryan Khanna

 

NEW DELHI – States are expected to raise around INR 4.5 trillion through bond issuances in the March quarter, economists and market participants said ahead of the release of the indicative calendar for Jan-Mar state borrowing expected this week. If the calendar is stuck to, states' total bond issuances for the financial year ending March will be just above INR 12 trillion, a record figure.

 

"We estimate the gross (state) borrowing in 4Q (Jan-Mar) to be in the INR 4.3 trillion-INR 4.7 trillion range, given the financing needs of the near 3.1% of GDP as state fiscal deficit," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. ICICI Bank also expects total state bond issuances in FY26 to hit INR 12 trillion, implying an actual borrowing of just under INR 4.5 trillion in the March quarter.

 

States have borrowed INR 7.54 trillion in Apr-Dec, with fundraising in the quarter ending December slowing sequentially. Traders said that this was due to the Reserve Bank of India's intervention after a torrid pace of borrowing in the first half of the financial year. States raised INR 5.01 trillion through bonds in Apr-Sept, up 30% on year. The RBI had discussed cash management and market borrowings with state finance secretaries in September. The projected borrowing in the March quarter is only around 4% higher on year.

 

"We are tracking that states will borrow around INR 4.5 trillion in the last quarter. Calendar should also be in that range, of INR 4.5 trillion or INR 4.75 trillion," a treasury official at a state-owned bank said. "After the market had given feedback, the RBI is also keeping an eye on what states are borrowing so I don't think it will be a negative surprise."

 

The shift in states' borrowing patterns from long-term bonds in Apr-Sept to more bonds maturing in less than 10 years in recent auctions has been a market positive amid subdued demand from life insurers and pension funds, dealers said. However, this has led to widening spreads of the 10-year state bonds over the 10-year benchmark gilt yield – at its peak this year, the spread rose to 109 basis points at the auction on Dec. 23.

 

The pattern is likely to continue in the March quarter but banks' appetite for state bonds is likely to be robust as they seek to replace gilts sold to the Reserve Bank of India with higher-yielding state government securities. The central bank has bought a record INR 7 trillion of gilts in 2025, of which INR 1.5 trillion came in December, with open market operation purchases worth another INR 1.5 trillion due until Jan. 22.

 

Still, some market participants expect the keenly awaited borrowing calendar by states to be higher than the actual issuance, which may spook traders. The 10-year benchmark gilt yield may rise to around 6.65% from 6.60% on an adverse calendar near INR 5 trillion, with a rise to 6.70% yield seen if the calendar tops INR 5 trillion. In Oct-Dec, states raised INR 2.53 trillion via bonds, lower than the indicative amount by around 10%. This is because issuances picked up in the latter half of the quarter – states' undershot the indicative calendar by a third in October.

 

"...gross bond issuance is likely to be INR 11.9 tln for FY26, implying INR 4.5 tln as actual issuance in Q4," IDFC FIRST Bank's Chief Economist Gaura Sen Gupta said in a note last week. "The calendar tends to be higher than actual issuance and is likely to be INR 4.9 tln in Q4FY26 v/s INR 4.7 tln calendar in Q4FY25."

 

ICICI Securites Primary Dealership also pegged the calendar in a range of INR 4.75 trillion to INR 5 trillion. Some traders and economists disagreed, saying that states had spread their borrowings more evenly in the current financial year after borrowing nearly 40% of their full year needs in the March quarter of 2025. With the heavier issuances in the first half and the slowing pace in Oct-Dec, the market view was that supply would eventually not cross INR 4.5 trillion in Jan-Mar, only slightly higher than INR 4.34 trillion the previous year.

 

"I don't think states' finances are in such a bad situation that they will need to borrow nearly INR 5 trillion," said Aditya Vyas, chief economist at STCI Primary Dealer. "However, due to the adjustment made in Q3 (Oct-Dec), the Q4 (Jan-Mar) borrowing may be around INR 4.5 trillion."  End

 

Edited by Akul Nishant Akhoury

 

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