States, UTs eye ₹4.99 trillion borrowing through SDLs in Q4FY26

States and Union territories plan to borrow up to Rs 4.99 trillion through state development loans in the fourth quarter, with heavy supply expected to keep bond yields under pressure

States and Union territories plan to borrow up to Rs 4.99 trillion through state government securities in the fourth quarter of the current financial year, the Reserve Bank of India said in a release on Friday.

 

The borrowing amount was on the higher end of expectations. The bond market was expecting SDL issuance between Rs 4.5 trillion and Rs 5 trillion.

 

“Overall, the borrowing numbers are broadly in line with expectations and towards the upper end of market estimates. Issuances have bunched up in Q4 after being artificially subdued in Q3, and net G-sec and SDL supply available to the market is higher than Q3 even after accounting for OMOs,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

 

 

“This comes at a time when there are no expectations of a rate cut, which is likely to push up yields. The market will also be focusing on large gross supply of G-sec and SDLs in FY27. Redemptions will be around Rs 10 trillion in FY27, resulting in elevated gross issuance,” she added.

 

States had borrowed Rs 5 trillion through state bonds in the first half of FY26, with Q2 issuances marginally exceeding the indicative borrowing calendar, the first such instance in seven quarters.

 

The planned issuance is higher than the Rs 4.73 trillion seen in the corresponding quarter of the previous financial year. Market participants said the heavy supply, estimated at nearly Rs 40,000 crore–Rs 50,000 crore a week, could weigh on the market, particularly as yield spreads are already wide at around 80 basis points–100 basis points between central government securities and state development loans on 10-year bonds.

 

“These wide spreads are likely to persist through Q4, with yields expected to rise by around 2 bps–3 bps as the immediate reaction. Some support, however, comes from the RBI’s recent secondary market purchases of Rs 4,155 crore on December 24, which indicate the central bank is closely monitoring yield levels and may step in around the 6.65 per cent–6.70 per cent (yield on the benchmark bond) zone, offering some relief amid the elevated supply,” said V R C Reddy, treasury head at Karur Vysya Bank.

 

The weighted average maturity of state development loans (SDLs) has been rising over the past few years and has extended further in FY26. From around 11 years during FY18 to FY20, the average maturity increased to 13.3 years during FY21 to FY25. In the first half of FY26, it rose further to 16.6 years, up from 14.3 years in FY25.

 

“Broadly within the anticipated range, the quantum is still large enough to exert some near-term pressure on bond yields. As a result, bond yields are likely to react negatively in the near term. At this stage, additional OMOs in Q4 do not appear necessary as a base case, though they cannot be entirely ruled out depending on evolving factors such as rupee dynamics and broader liquidity conditions. Looking ahead to FY27, given trends in credit-deposit growth, currency in circulation, and system liquidity, there is a reasonable possibility of further OMOs over the medium term,” said Sakshi Gupta, principal economist at HDFC Bank.