RBI asks states to spread borrowings across tenures as bond yields surge

India's central bank has asked states to spread their borrowings across tenures rather than focusing on long-term bonds and to communicate fundraising plans more precisely to the markets, according to four sources aware of the discussions. 

Indian states are set to borrow a record ₹12 trillion ($135.95 billion) in fiscal 2026, and yields on their bonds have risen between 30-60 basis points so far this year, disrupting markets. 

The Reserve Bank of India manages borrowings for the federal and state governments. A spokesperson from the RBI did not reply to a Reuters email seeking comment. 

The sources requested anonymity as they were not authorised to speak to the media. 

In a meeting this week with state government officials, the RBI advised states to spread their borrowing across the yield curve, three of the four sources said. 

In the last few auctions, cut-off yields for longer-duration state bonds surged by as much as 50 basis points amid limited appetite from long-term investors and weak demand from banks. 

The central bank also asked states to try and stick to their indicated borrowing calendar as much as possible, these sources added. 

States tend to generally borrow lower or higher than the indicated quantum, based on their present funding requirements, which keeps traders confused. 

Planning around market borrowing is very ad-hoc for most states, said one of the sources, who works in the treasury department of a large private bank. "Whenever they need funds, they accept bids at exorbitant levels, which disturbs the entire market and leads to mark-to-market losses." The central bank has communicated to the state governments banks' concerns that several large banks are nearing their internal limits for state debt investments, banking sources said. 

States did not see this as a major risk, a state government source told Reuters. 

The RBI asked banks to focus on reissuing existing securities, the state government source said, adding that this will increase trading volumes in the secondary market and improve liquidity. 

Currently, very few states reissue existing securities and prefer fresh bond sales at every weekly auction. This makes it difficult for investors to exit, forcing banks and investors to hold these securities till maturity, which limits their appetite for fresh purchases, the sources added. 

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