Something is amiss in India’s debt market & it’s yet to take stock, Pg11

Key Highlights:

• Short-term interest rates have decreased, but long-term central government bond yields have remained relatively stable over the past year.
• Borrowing costs for state governments have significantly increased, now comparable to AAA-rated corporates.
• The repo rate fell by 125 basis points from 6.5% to 5.25% in 2025.
• Yields on 10-year Gujarat government bonds rose from 7.02% to 7.38% between January 2025 and February 2026.

Detailed Insights:

• The RBI's Monetary Policy Committee initiated interest rate cuts in February 2025, leading to a decrease in the 91-day T-bill yield from 6.54% in January 2025 to 5.28% in February 2026.
• Despite the central bank's interventions through open-market operations, the 10-year G-sec yield remained elevated, hovering near 6.7% in February 2026.
• The substantial supply of government securities, with the Centre planning to borrow Rs 17.2 lakh crore in 2026-27, is exerting upward pressure on yields.
• Increased state government borrowings, estimated at Rs 12.45 lakh crore in 2025-26, coupled with concerns over fiscal stress and populist policies, have contributed to the surge in state bond yields.
• The narrowing spread between state bond yields and corporate bond yields raises questions about the accurate pricing of credit risk in the market.
• Home loan interest rates for high-quality borrowers are only slightly higher than government bond yields, suggesting banks may not be adequately charging for the risk associated with individual borrowers.

Key Concepts Involved:

• Repo Rate: The rate at which the central bank lends money to commercial banks against the security of government securities.
• G-Sec Yield: The return an investor can expect to receive from holding a government security until it matures.
• Open Market Operations: The buying and selling of government securities by the central bank to control the money supply and credit conditions.