The Reserve Bank of India (RBI) has advised state governments to adopt a more strategic approach to borrowing, in light of the record 12 trillion rupees ($135.95 billion) they are set to borrow in fiscal 2026. The central bank has suggested that states spread their borrowings across different tenures, rather than focusing on long-term bonds, which have seen yields rise by 30-60 basis points so far this year. This surge in yields has disrupted markets and led to concerns among investors.
In a meeting with state government officials, the RBI recommended that states stick to their indicated borrowing calendar as much as possible, rather than borrowing more or less than planned. This would help to reduce uncertainty and volatility in the market. The central bank also encouraged states to reissue existing securities, rather than issuing new bonds at every weekly auction. This would increase trading volumes in the secondary market and improve liquidity, making it easier for investors to exit their positions.
The RBI’s advice is motivated by concerns that several large banks are nearing their internal limits for state debt investments. If states continue to issue new bonds without reissuing existing securities, it could lead to a decrease in demand from banks and other investors, forcing them to hold these securities till maturity. This could limit their appetite for fresh purchases and disrupt the market further.
State governments have been criticized for their ad-hoc approach to market borrowing, which can lead to exorbitant borrowing costs and mark-to-market losses. The RBI’s guidance is aimed at promoting a more disciplined and transparent approach to borrowing, which would help to maintain stability in the market and reduce the risk of disruption. By spreading their borrowings across different tenures and sticking to their indicated borrowing calendar, states can help to reduce uncertainty and volatility, and create a more favorable environment for investors.