Record State Borrowing Spree Pushes Indian Bond Yields Higher

Yields on the government’s 30-year debt have surged 56 basis points since their low in April to 7.32%. Similar-dated notes for states are offering a yield of 7.54%, with the borrowing spree pushing up the premium they pay over federal government bonds. Borrowing costs for Indian companies also climbed the most in more than two years last week.

At a recent debt sale, states also raised less than expected amid weak demand.

The rise in borrowing costs couldn’t have come at a worse time for issuers. The US has imposed a steep 50% tariff on imports from India, and to cushion the slowing economy from further damage the government needs to boost its expenditure. By pushing up yields, markets are warning any fiscal slippage will come at a cost.

State borrowing is pinching corporate borrowers even more than it is hurting the federal government, said Soumyajit Niyogi, a director at India Ratings & Research Pvt., a local unit of Fitch Ratings. “When the state bond yield is going up, investors of corporate bonds such as pension funds and provident funds will obviously prefer to buy state bonds.”

The increase is stark in longer maturity debt, prompting long-bond bulls to slash their holdings. The average tenor of state bonds has climbed to 17 years in the first half of the fiscal year till date, well above the historical 12-year average, according to a Kotak Mahindra Bank note.

The sharp rise in states’ borrowing could be due to higher capital expenditure needs and welfare spending by some provinces that held elections last year, said A. Prasanna, chief economist at ICICI Securities PD. It also reflects a more even distribution of borrowings across the year, he said.