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Informist, Wednesday, Apr. 8, 2026

 

By Cassandra Carvalho

 

BENGALURU – Karnataka is looking to issue longer tenure bonds in 2026-27 (Apr-Mar) as its short-term borrowing requirements are met, and state government officials are cognisant of rollover risk, P.C. Jaffer, secretary (budget and resources) and Mohammed Ikramulla Shariff, joint secretary (budget and resources), told Informist in an interview Thursday. The state will continue to issue bonds with odd maturities to avoid a pile-up of redemptions in the last quarter of a fiscal, when most of its borrowing takes place, they said. In FY26, Karnataka's highest tenure of issuance was a 15-year paper, as per data compiled by Informist.

 

"For Karnataka...we are consciously looking at few long term (bond issuances). Whether that is in the range of 20 to 30 (years) or 30 to 40 (years) is something that we still have to take a call," Shariff said. "But our profile in the 0 to 5 (tenure bucket) is broadly where we want it to be optimal."

 

The department also avoids more than one bond issuance in each tenure bucket in order to increase liquidity and park redemptions in low spending months such as August. Karnataka had "taken a conscious decision" to "significantly" increase reissuances of its bonds in FY26 and intends to follow this practice in FY27, the officials said. The department also monitors, week to week, the investment appetite of large investors, including banks and pension funds, they said.

 

The state government's choice of tenures is dictated both by its own redemptions and the Centre's borrowing plan. In Apr-Sept, the Centre has cut the supply of bonds with a maturity of 30 to 50 years while raising its borrowing through five-year bonds, compared to its issuance pattern last year. Aligning the state's calendar with the Centre ensures better liquidity and lower borrowing costs, the officials said.

 

Currently, 60% to 70% of the state's debt matures within five to eight years, the officials said. Karnataka's debt maturity profile over the past decade has largely been concentrated in bonds maturing up to 10 years, Shariff said.

 

Karnataka expects to continue raising most of its funds in the March quarter as that is when it spends half of its budgeted full-year allocation, with around 25% of the spending coming in March alone. The state's cash pile was at a healthy level at the end of March and usually, that helps stave off borrowing in the first quarter of the next fiscal, the officials said.

 

Karnataka has not borrowed in the June quarter between FY22 and FY26 but has pencilled in issuances worth INR 54 billion in Apr-Jun of FY27. A lack of return on investments also deters fund-raising early in the financial year, and the state avoids a "negative carry" on the cash it raises, they said. The last quarter is also when the state government gets its revenue picture clearer.

 

"So, now the question is, should I borrow in the earlier months and end up paying 7% or 7.5% or 8% interest on that borrowing for six months when I do not need the money? Or should I borrow in the last quarter with a little extra markup?" Jaffer said. "...collectively, institutionally, we have been deciding that okay, when we have cash surplus let us not borrow...Borrow with a little extra markup. Still when you calculate the overall financial thing, it is not very bad for us."

 

ODD-MATURITIES

Joint Secretary Shariff pioneered the practice of issuing bonds with odd maturities, typically issuing five-and-a-half year bonds instead of five-year or six-year bonds, a practice that has now been adopted by several states. This avoids rollover risk in the March quarter and puts the rollover in the autumn season, when spending is lower, the officials said.

 

The idea to issue such odd-maturity bonds was put forth by Karnataka in a working group that included other states, the union finance ministry, and the RBI. The experiment began in FY25 after discussions with the central bank, the officials said. In FY26, Karnataka issued several bonds with odd maturities such as 5.5 years, 6.5 years, and so on, while it also issued bonds with regular, full-year maturities.

 

"We need to necessarily borrow in fourth quarter, that is a decision we have taken. That does not mean that we need to necessarily end up repaying in the same place. So why not get a 5 and a half years or 6 and a half years or 13 and a half years so that you borrow in March and repay in September?" Secretary Jaffer said.

 

The officials said they have not observed any significant statistical difference between yields on bonds maturing in a full year and those maturing in odd maturities, fulfilling the aim of the pilot. The issuance of such tenures also allays investors' fears of reinvestment at the end of a financial year when their focus is on their balance sheets. Bonds with these tenures have seen robust demand, surprising even the issuers slightly. The success led to other states reaching out and adopting the practice, which in FY26 included Gujarat and Tamil Nadu. The Karnataka officials said they do not see the need for issuance of such odd maturity tenures in the first three quarters of the financial year but are still evaluating that decision for FY27.

 

Nine states are working with the Reserve Bank of India and the Centre in a pilot programme to implement the Benchmark Issuance Strategy for state government securities, starting from this quarter. This will boost trade in these securities in the secondary market, the officials said. However, Karnataka is not part of the pilot in the June quarter.

 

FISCAL MATH

The state is committed to not increasing its fiscal deficit beyond 3% of its Gross State Domestic Product, in line with best practices recommended by the Centre and the 16th Finance Commission, Jaffer said. Karnataka follows an internal policy which mandates its repayments in any financial year do not exceed around 1% of the estimated GSDP. The department has recommended adoption of this policy to other states.

 

The state's withdrawal of road tax exemption for electric vehicles costing under INR 2.5 million was to shore up revenue, the Budget Secretary said. The tax rate would still favour the new and more sustainable technology, he said. Karnataka has set the top tax rate on three-wheeler electric vehicles and electric cars at 10%, lower than the minimum 13% levied on petrol and diesel vehicles.

 

"The thought process is that we have to promote clean mobility, yes. At the same time, it need not be completely free especially a vehicle costing 1 crore (INR 10 million) or 50 lakhs, 60 lakhs (INR 5-6 million) ...," Jaffer said. "So, that is also an area where we have some potential for collecting some revenue."

 

In its budget for FY27, Karnataka estimated revenues of INR 3.15 trillion, and total expenditure of INR 4.48 trillion, signifying a budget deficit of INR 1.33 trillion. While the FY27 Budget does not provide a market borrowing figure, in FY26 the state raised INR 1.06 trillion through bond issuances. It has estimated an internal debt of INR 1.25 trillion in FY27. Since FY24, the state's gross borrowing has risen 31%. End

 

With inputs from Aaryan Khanna and Shubham Rana

Edited by Ashish Shirke

 

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