India’s bond market is at an intriguing crossroads. Despite benign inflation, stable crude prices, and no major global shocks, the 10-year G-sec yield has jumped 17–20 bps since July. The culprit? A mix of technical and structural pressures at the longer end of the curve.
The shift is puzzling, especially as the RBI maintains a neutral stance and liquidity remains ample. But the bond market is picking up on deeper signals: weaker tax collections, an elevated fiscal deficit in Q1 FY26, and, most importantly, a flood of longer-dated State Development Loan (SDL) issuance.
SDLs Take Center Stage
- FYTD SDL issuance is up 37% year-on-year, adding nearly ₹87,000 crore of extra supply compared to last year.
- The skew is striking: 65% of SDLs since July are beyond 15 years maturity, compared to the usual 40–50%.
- The 13–15-year and 20–25-year buckets alone account for nearly half of this issuance.
This tilt is reshaping demand-supply dynamics. With banks’ appetite for SLR securities expected to moderate and long-term investors like NPS and insurers showing a greater tilt toward equities, absorption of long-tenor paper has become harder.
The RBI’s absence from OMO purchases since June has only amplified the pressure, widening spreads in the 5–15-year segment to levels well above their 3–5-year trend.
The Fiscal Angle
States’ Q1 FY26 deficit was unusually high, reflecting softer revenues and front-loaded capex. Even so, economists expect full-year borrowing to stay within the planned ₹12.4 trillion, though the quarterly profile suggests supply will stay elevated until at least December 2025.
What Next?
The widening spreads raise a critical question: are yields set to climb further, or is relief in sight?
Two potential catalysts could ease long-end pressures:
- Growth Slowdown → If economic momentum softens, the RBI may be nudged toward fresh easing.
- Tenor Adjustments → A more balanced issuance strategy could help anchor long-dated yields.
Until then, market caution is likely to persist, with investors watching both fiscal signals and central bank cues closely.
🔥 Curious Takeaway: With SDLs flooding the long end and demand faltering, India’s bond market is testing its limits. The next move — from growth data, fiscal tweaks, or the RBI — could decide whether yields stabilize or climb to new highs.
