India benchmark bond yield climbs to nearly 11-month high on deepening supply woes
India's benchmark 10-year bond yield surged to 6.7194% on Tuesday, reaching its highest level since March 4, driven by heavy state borrowing and tight liquidity conditions. Despite the RBI's announcement of plans to inject more than $23 billion into the banking system, states sold 398 billion rupees of bonds at elevated yields, with record borrowing of 5 trillion rupees announced for January-March. The government's expected record gross borrowing plan of 16-17.5 trillion rupees for the next fiscal year is creating supply concerns that continue to pressure the bond market.
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India's government bond yields surged on Tuesday, with the benchmark 10-year yield reaching its highest level in nearly 11 months as heavy state borrowing and tight liquidity conditions overshadowed central bank support measures. The benchmark 10-year 6.48% 2035 bond yield settled at 6.7194%, marking its highest level since March 4, compared to Friday's close at 6.6635%.
Market Pressures Override RBI Support
Despite the Reserve Bank of India's announcement after market hours on Friday of plans to inject more than $23 billion of liquidity into the banking system, rising supply concerns dominated market sentiment. The central bank's liquidity support measures failed to offset the impact of substantial state debt issuances during the trading session.
Heavy State Borrowing Weighs on Markets
The bond market faced significant pressure from state government debt supply, with key metrics highlighting the scale of borrowing:
| Parameter: | Amount |
|---|---|
| State bonds sold Tuesday: | 398 billion rupees |
| Record state borrowing (Jan-Mar): | 5 trillion rupees |
| Expected govt gross borrowing (next FY): | 16-17.5 trillion rupees |
States sold the 398 billion rupees of bonds at slightly elevated yields, reflecting the challenging market conditions and investor demand-supply imbalances.
Liquidity Constraints Persist
India's banking system liquidity remained constrained despite policy support. The average bank liquidity surplus stayed at 0.2% of bank deposits in January, with the daily average at 569 billion rupees. This falls well below Governor Sanjay Malhotra's stated target range of 0.6%-1% of deposits for surplus liquidity.
According to BofA Securities economists, "Despite the RBI resuming its rate cutting cycle in December, the rate transmission has stalled meaningfully thanks to tight liquidity conditions."
Interest Rate Curve Movements
The overnight index swap curve steepened further amid tight liquidity conditions:
| Tenor: | Rate | Change |
|---|---|---|
| One-year OIS: | 5.5925% | Slightly down |
| Two-year OIS: | 5.76% | Up 3.25 bps |
| Five-year OIS: | 6.18% | Up 4.25 bps |
Broader Market Context
Indian bond yields have risen in recent weeks despite record RBI bond purchases and 100 basis points of rate cuts already delivered this year. The persistent yield increases reflect unfavorable demand-supply dynamics for debt, further exacerbated by news of the deferral of index inclusion. The government's expected record gross borrowing plan for the next fiscal year, ranging between 16 trillion rupees to 17.5 trillion rupees, represents a supply glut that traders fear will continue to weigh on bond performance.
Historical Stock Returns for Bank of India
| 1 Day | 5 Days | 1 Month | 6 Months | 1 Year | 5 Years |
|---|---|---|---|---|---|
| +2.20% | +3.71% | +15.81% | +44.10% | +63.64% | +223.75% |
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