Banks urge RBI to extend G-Sec issuances into March amid heavy supply

Urge state bond auction via uniform pricing; more of shorter tenure bonds in H2

Amid hardening bond yields driven by weaker institutional demand and other factors, commercial banks have requested the Reserve Bank of India (RBI) to extend central government bond issuances into March of the current financial year, rather than concluding them in February. This is expected to ease weekly heavy issuance pressure.

 

The central bank held a series of discussions with bond market participants last week, ahead of finalising the borrowing calendar for the second half of the financial year.

 

 They have urged the RBI to conduct all state government securities auctions using the uniform pricing method. Currently, weekly auctions of state bonds follow a multiple price system. Under the multiple price auction framework, successful bids are accepted based on the yield or price specified by the bidder. In contrast, uniform pricing sees all successful bids allotted at the RBI-determined cut-off yield.

 

“The request was to switch to a uniform price method as it will help 

 

compress the spread,” said the treasury head at a private bank. “Uniform price method is good for a high supply and low demand environment,” he added.

 

Additionally, banks have pressed for a reduction in ultra-long issuances of 30–50 years by 4–5 per cent, advocating for a higher share of 5–7-year bonds to better align with prevailing investor appetite.

 

The borrowing calendar for the second half of FY26 is expected to be announced later this month.

 

“Banks have requested to extend the auctions until March, as this will ease some supply-side pressure,” said a market participant. “Around ~60,000 crore of central and state bonds are flooding the market each week, but with investment and trading books already stretched, the ability to absorb new supply is steadily shrinking. Until last financial year, there was around ~35,000 crore supply each week.”

 

With the government’s second-half borrowing plan pegged at ~6.8 trillion, banks say state borrowings and weak demand for long-dated bonds are straining liquidity.

 

Bond yields have surged across the board despite a 100 basis point reduction in the policy repo rate since February, including a front-loaded 50 basis point cut in June’s monetary policy review.

 

A combination of factors -- oversupply of long-duration bonds, fading hopes of further policy easing, and short positions by investors -- has driven the hardening of bond yields.

 

Since the 50 basis point rate cut in June, the benchmark 10-year bond yield has risen by 26 basis points.

 

“The yield curve is bear steepening, that’s why there is less appetite for long-end papers. Earlier, states were restricting issuance to 10–11-year papers. Now they are issuing 25–30-year bonds as well,” said the treasury head at a private bank. “Banks have requested the RBI to shift around 5 per cent towards the short end of the curve -- 2, 3, and 5-year segments -- so the yield curve will slightly flatten,” he added.

 

Market participants say 2025-26 has seen a significant rise in the average tenor of state government borrowings, resulting in a demand-supply mismatch. Telangana, Kerala, West Bengal, Punjab, Maharashtra, Madhya Pradesh, Rajasthan, and Bihar have sharply increased the tenor of their issuances. So far in the current financial year, states’ borrowings have risen by 31 per cent year-on-year.

 

Long-tenor bonds traditionally attract investment from pension funds and life insurers. A regulatory change permitting pension funds to invest 25 per cent of assets in equities, up from 15 per cent, has redirected a significant share of incremental funds towards equities. Life insurance companies have also shifted more investment into equities in search of better returns.