Indian Banks Tell RBI They’ve Limited Room To Buy State Bonds

While there’s no regulatory cap on state bond purchases, Indian banks follow internal prudential limits as a risk measure. For state-run banks, this typically ranges between 45–55% of investments, and for private banks, 15–20%, the people said.

Given banks’ role in the state bond market, a potential slowdown in their purchases spells trouble for India’s state governments, which have completed just over 26% of their estimated borrowing for the current fiscal year.

There’s little the central bank can do to ease state bond investment limits, as these are set by the boards of individual banks, the people said.

Bloomberg News reported last week India’s banks have approached the RBI to ask for actions to stem a government bond selloff.

The lack of demand was evident in last week’s state bond auction, where some issuances failed to attract sufficient investor bids. Indian states raised 288.9 billion rupees ($3.3 billion), less than the planned 341.5 billion rupees.

Weak appetite has spilled over to central government bonds, with the yields on the benchmark 10-year bond rising by 19 basis points in August, the sharpest monthly jump since September 2022.

Adding to the pressure are concerns that the federal government may ramp up borrowing to offset revenue losses from recent consumption tax cuts.