Indian government bonds ended largely unchanged Wednesday, with the benchmark 10-year yield settling at 6.61% compared to the previous session's close of 6.61%. The flat performance followed disappointment over the Reserve Bank of India's selection of illiquid papers for next week's debt purchase operations, bucking market expectations for inclusion of liquid benchmark securities.

RBI's Debt Purchase Strategy Disappoints Markets

The central bank continued its pattern of selecting illiquid papers for bond purchases, avoiding the former benchmark bonds and other liquid securities that traders had hoped would be included in market operations. This approach has kept market sentiment tepid despite the RBI's aggressive bond-buying program.

The Reserve Bank of India purchased ₹500 billion of bonds earlier this week and is scheduled to bid for twice that amount through January 22. However, the focus on illiquid papers has failed to address broader market liquidity concerns.

Supply Concerns Persist Despite Record Purchases

Despite the RBI's record ₹4.70 trillion bond purchases this financial year, concerns about hefty supply continue to weigh on market sentiment. State and central governments are set to raise more than ₹8 trillion through March end, creating ongoing supply-demand imbalances.

"Going ahead, we expect the excess supply concerns to continue unless we witness the revival in demand by pensions, insurance and banks," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. State-run banks' preference for state bonds over central government securities has also contributed to elevated yields.

Bloomberg Index Inclusion Awaited

Traders are closely monitoring developments regarding the potential inclusion of Indian bonds in the Bloomberg Global Aggregate Index. Goldman Sachs analysts estimate the index weight could be 0.70% with potential inflows of $10-20 billion post-inclusion, which could provide significant demand support.

Swap Rates Show Easing Pressure

India's overnight index swap rates eased Wednesday, led by receiving pressure in longer-duration swaps. The curve flattened as longer-term rates declined more significantly than shorter tenors.

Indian states have spent ₹1.68 trillion on women's cash transfer schemes, creating fiscal stress with 6 out of 12 states facing revenue deficits. This situation highlights the urgent need for a coordinated national approach to welfare reform across India's federal structure.

The Economics Behind Cash Transfers

Cash transfers have evolved from being dismissed as populist measures to becoming recognized as highly effective poverty reduction tools. Over 180 countries now implement direct cash payment programs due to their proven benefits. Unlike traditional subsidies, cash transfers provide households with choice and flexibility to address their specific needs—whether food, healthcare, or education.

Research demonstrates that this flexibility significantly improves nutrition, school participation, and financial stability while reducing administrative costs and leakages on a national level. The impact becomes even more pronounced when cash is transferred directly to women.

Proven Impact on Women's Empowerment

Evidence from existing state schemes validates the effectiveness of women-focused cash transfers. Key findings include:

These results demonstrate that even modest transfers can substantially boost household welfare while injecting liquidity into local economies.

Growing Fiscal Stress Across States

Currently, 12 states operate unconditional cash transfer schemes for women, creating unprecedented fiscal commitments. Based on FY26 budget estimates, the financial impact is substantial:

A revenue deficit indicates that a state's regular income cannot cover day-to-day spending, forcing increased borrowing. Karnataka's fiscal position illustrates this challenge—moving from a revenue surplus of 0.30% of GSDP to a deficit of 0.60% once UCT spending is included. Similarly, Madhya Pradesh's surplus narrows dramatically from 1.10% to just 0.40% of GSDP.

Debt Crisis and Economic Consequences

State debt levels have reached concerning heights, with combined fiscal deficits rising from 2.40% to 3.00% of GDP between FY06 and FY25. Outstanding state debt now stands at 27.50% of GDP, significantly exceeding the 20.00% level recommended by the FRBM Review Committee.

High debt creates two critical problems:

1. It reduces spending effectiveness through lower spending multipliers, meaning heavily indebted states achieve less economic growth per rupee spent compared to low-debt states.
2. Rising interest payments crowd out capital expenditure and development spending, weakening states' economic capacity and future growth potential.

Path Forward: Coordinated Reform Strategy

The solution requires comprehensive welfare architecture reform rather than abandoning beneficial programs. States need a national mechanism to track fiscal exposure and evaluate scheme outcomes, potentially through a central coordinating body under the finance ministry or NITI Aayog, similar to the GST Council.

The original universal basic income concept envisioned cash transfers replacing subsidies and overlapping schemes, not adding to them. This demands consolidating overlapping programs and discontinuing underperforming ones. Such reform requires difficult political choices and broad consensus, challenging in the current scenario but essential for sustainable welfare delivery.

Without coordinated action, well-intentioned welfare schemes risk creating long-term fiscal instability that could ultimately undermine their poverty reduction objectives.