India State Debt Surge to Hit Bonds, Rates: BoA Trader
Vikas Jain, head of India fixed income at Bank of America, warns of record borrowing by Indian states, estimating ₹4.50 lakh crore in the Jan-Mar quarter, a 60% increase. This surge is expected to pressure bond markets and keep interest rates high despite RBI's monetary easing. State borrowing could reach ₹13.50 lakh crore next fiscal year, potentially surpassing federal net borrowing. The increased supply is limiting the transmission of rate cuts, with 10-year bond yields reaching a nine-month high of 6.68%. State bond spreads have widened to around 40 basis points over federal debt, raising concerns about crowding out private borrowers and increasing funding costs for banks and companies.
*this image is generated using AI for illustrative purposes only.
A veteran trader at Bank of America Corp has issued a stark warning about India's escalating state debt crisis, cautioning that record borrowing by provincial governments may continue to pressure bond markets and keep interest rates elevated despite monetary easing by the central bank.
Record State Borrowing Expected
Vikas Jain, head of India fixed income, currencies and commodities trading at Bank of America, estimates that Indian states are likely to borrow ₹4.50 lakh crore in the three months through March. This represents a dramatic 60% jump over the current quarter and puts state governments on course to potentially hit record supply levels in the fiscal year ending March 2026.
| Parameter | Current Quarter | Jan-Mar Quarter | Change |
|---|---|---|---|
| State Borrowing | Base level | ₹4.50 lakh crore | +60% |
| Fiscal Year Impact | Previous levels | Record supply | New high |
Market Concerns Over Supply Glut
"The state bond supply is definitely going to increase sharply and that's why real money investors are not ready to commit a significant amount of investment at this point in time," Jain explained. "The market is a bit concerned about that." The surge in state borrowing comes as gross borrowings by Indian states have already jumped almost 20% this fiscal year, driven by slower growth in tax revenues while spending has increased.
Rate Transmission Challenges
Despite the Reserve Bank of India implementing 125 basis points of rate cuts this year, the transmission to bond markets has been severely limited. The benchmark 10-year bond yield has eased just 13 basis points, while top-rated company bond yields have actually climbed over 11 basis points.
| Metric | Rate Movement | Impact |
|---|---|---|
| RBI Rate Cuts | 125 basis points | Monetary easing |
| 10-year Bond Yield | -13 basis points | Limited transmission |
| Corporate Bond Yield | +11 basis points | Rising costs |
| State Bond Spread | ~40 basis points | Widening premium |
The 10-year bond yield reached a nine-month high of 6.68% on Monday as states announced larger-than-scheduled bond auctions. This market pressure forced Power Finance Corp., a state-owned utilities firm, to cancel its bond sale on Tuesday.
Future Outlook and Market Impact
Jain projects that gross state borrowing may rise to as much as ₹13.50 lakh crore in the next fiscal year, compared to an estimated ₹12.00 lakh crore this year. This supply could potentially surpass federal net borrowing of ₹11.50 lakh crore when adjusted for central bank bond purchases.
The heavy issuance of longer-duration debt is "hampering the overall transmission of rate cuts in the bond market and the economy," according to Jain. State bonds face limited demand as global investors and foreign banks avoid exposure to illiquid debt, while domestic players have investment limits for such securities. "With a limited number of buyers, the spreads will continue to widen," he noted.
Broader Economic Implications
The surge in state borrowing risks crowding out private borrowers and raising funding costs for banks and companies. The yield on state bonds has risen sharply in recent months, with spreads over federal debt widening to around 40 basis points. This dynamic threatens to undermine the central bank's efforts to stimulate economic growth through lower interest rates, as the benefits may fail to reach the broader economy effectively.
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