Indian government bonds slipped on Monday as market sentiment remained subdued following the Reserve Bank of India's focus on shorter-tenor securities in its latest open market purchase operations. The decline comes as traders prepare for a significantly heavier state debt supply scheduled for Tuesday.

Bond Market Performance

The benchmark 10-year government bond yield settled at 6.59%, rising from Friday's closing level of 6.56%. Despite Monday's increase, the 10-year yield had eased 4 basis points during the previous week, marking its biggest weekly decline since the week ended September 5.

RBI Open Market Operations Impact

Market sentiment weakened after the Bank of India purchased ₹50,000 crores worth of bonds in the first of its four planned tranches. The central bank's buying pattern showed a clear preference for shorter-duration securities, with more than ₹24,000 crores allocated to bonds maturing in 2029 and 2030.

This approach contrasts with the Bank of India's strategy in earlier open market operation auctions conducted this month, where the central bank had purchased aggregate shorter-tenor bonds worth only ₹8,400 crores across two sessions.

Liquidity Conditions and Future Outlook

With banking system liquidity remaining tight, market participants expect the central bank to conduct additional open market operations to inject funds into the system. Radhika Rao, executive director and senior economist at DBS Bank, noted that frictional drivers are expected to narrow core liquidity sharply by the March 2026 quarter, suggesting further tranches of open market operations might be necessary.

State Debt Supply Pressure

Adding to market concerns, states are scheduled to raise ₹35,450 crores through bond sales on Tuesday, representing an increase of ₹20,000 crores from the originally scheduled amount. This substantial increase in supply is contributing to the cautious market sentiment.

Analysts project total debt supply for the January-March quarter at approximately ₹8.10 lakh crores, comprising about ₹3.10 lakh crores from the central government and ₹5.00 lakh crores from states. This quarterly supply level represents a record high and is roughly 25% above the current quarter's issuance.

Interest Rate Movements

India's overnight index swap rates experienced modest increases during a relatively shallow trading session. The one-year OIS rate rose slightly to 5.48%, while the two-year OIS rate increased by 2.5 basis points to 5.58%. The five-year OIS rate closed marginally higher at 5.94%, reflecting the overall cautious market sentiment amid supply concerns and liquidity conditions.

Commercial banks have approached the Reserve Bank of India (RBI) seeking an extension of trade relief measures that permit loan moratoriums for exporters beyond the current December 31 deadline. The measures, announced in mid-November, allow banks and non-banking finance companies to offer exporters moratorium on loan repayments and restructuring options to ease stress from delayed receivables and extended working capital cycles.

Relief Measures and Current Framework

The scheme was designed to prevent defaults amid global trade uncertainties and tariff-related disruptions. Under the current framework, borrowers with export credit facilities from regulated entities as of August 31, 2025, and classified as standard, are eligible for relief.

Banks Push for Quarter Extension

Banks have urged RBI to extend the scheme by one more quarter, citing continued challenges for exporters from supply chain realignments and certification delays. The request particularly focuses on sectors with high exposure to the United States, such as marine products.

"Exporters are reaching out to banks, seeking an extension of the RBI moratorium scheme," said B K Divakara, executive director at CSB Bank. "Most are waiting for clarity on trade deals to assess the cost impact of tariffs."

Lenders have pointed out that the full impact of global trade challenges is likely to become clearer in the next quarter, with factors including weak global demand, trade policy issues, and tariff-related matters creating ongoing stress for exporters.

Market Response and Banking Sector Outlook

Bankers report that uptake of the moratorium has been modest compared to similar schemes announced during the Covid period. However, they expect demand to increase in the next quarter as trade impacts become more apparent.

"We have not seen any major impact on our portfolio yet. The real impact will be felt next quarter. I am also not ruling out demand for RBI's restructuring scheme," said Bank of India Chairman C S Setty in a November 22 interview.

Setty observed that it was too early to assess the impact of the 50% tariff imposed by the US on Indian exports, noting that "many exporters can diversify their geographical markets in a short span of time."

Export Credit Landscape

A senior bank official indicated that extending the trade relief measures by at least one more quarter would provide a safety net if receivables remain delayed. The official noted that demand for relief measures may remain weak since exporters could offset tariff impact through a depreciating rupee, which has fallen nearly 6% over the past year.

The latest development underscores the ongoing concerns in the export sector and the banking industry's efforts to support exporters facing global trade headwinds amid continued economic uncertainty.