 "Yield curve steepens due to heavy sovereign issues; long-end demand weakens")
The net issue of government securities, central and state, this financial year surpassed that of last year while demand from key long-term investors such as insurance companies and pension funds has weakened, the Reserve Bank of India said in its Financial Stability Report, issued on Wednesday.
Assets of pension funds in government bonds rose to ₹5.87 trillion as of September 2025 from ₹4.68 trillion in March 2024, while the share of government bonds in their (pension funds’) high-quality liquid assets declined to 50.5 per cent from 53.1 per cent.
The share of government bonds held by insurance companies fell to 59.7 per cent of their high-quality liquid assets in March 2025 from 61.7 per cent a year earlier, alongside a rise in the exposure of equity and mutual funds.
“The supply of Central Government Securities (G-Sec) and State Government Securities (SGS) has risen considerably, with net issuance of G-Sec and SGS in the current fiscal year outpacing last year. However, the demand for long-term sovereign debt among the largest investors, viz., scheduled commercial banks, insurance companies and pension funds has declined. Even as banks accumulate more SGS and scale back on G-Sec, insurance and pension funds have shown a shift towards equity exposure,” the report said.
The report further stated that the sovereign yield curve became steep as monetary easing and softening inflation expectations pulled down short-term rates, while long-term yields remained under pressure due to persistent supply.
Short-tenor yields continued to decline in line with rate cuts by the Reserve Bank of India and surplus liquidity conditions, whereas longer-dated yields stayed elevated, leading to a widening and sustained rise in term spreads.
Meanwhile, flows of foreign portfolio investment into Indian government bonds, after surging following their inclusion in global indices last year, remained robust, partly supported by the widening difference in yields between Indian and American bonds.
The rupee however, depreciated against the dollar, reflecting deteriorating terms of trade due to higher American tariffs and a moderation in capital flows. With the effective American tariff rate on India higher than that faced by its key trading partners, the rupee weakened despite a broadbased softening of the dollar against major and Asian currencies.
The exchange market indicates a rise in depreciation pressure on the rupee. Importantly, the currency has traded in a wider range, leading to higher volatility. Signals from the market for currency derivatives also point to the likelihood of elevated volatility ahead as trade-related uncertainties continue to weigh on market sentiment.