India's largest-ever debt issuance by the government sends ripples through the rupee-denominated bond market

In early February, significant concerns are spreading in the market. Experts are actively debating the potential impact of India’s government debt plan on the bond market and its ripple effects. Finance Minister Nirmala Sitharaman announced a historic borrowing scale of 17.2 trillion rupees in her recent budget speech, starting from the new fiscal year in April, shocking market participants.

Details of the 17.2 Trillion Rupees Historic Borrowing Plan

India’s planned borrowing of 17.2 trillion rupees (approximately $187 billion) represents a substantial 18% increase compared to the revised estimates for the current fiscal year. This figure exceeds analysts’ expectations of 16.5 trillion rupees, indicating that the government’s funding needs are significantly higher than market forecasts.

The large supply of new rupee-denominated government bonds could fundamentally change the bond market landscape in the near future. Market participants are increasingly cautious about the liquidity impact of this unprecedented borrowing scale.

Rising 10-Year Bond Yields Trigger Market Chain Reaction

Kotak Mahindra Life Insurance Company and Ujjivan Small Finance Bank traders predict that the 10-year government bond yields could rise by 4 to 5 basis points on Monday. Additionally, ICICI Securities Primary Dealership expects yields to potentially reach the 7% mark within the next few weeks.

This rise in yields is driven not only by supply pressures but also by a combination of factors including large-scale additional debt issuance by state governments and declining demand from pension and insurance funds. As a result, rupee-denominated bond yields are expected to reach their highest levels in nearly a year.

Dual Pressures Facing the Indian Economy

The rising cost of funding is raising concerns about further burdens on the Indian economy, which already faces high tariffs from the US. If domestic companies’ funding costs increase, their willingness to invest in equipment and business expansion could diminish.

In response, the Reserve Bank of India has limited room for additional rate cuts to support economic growth. With high inflation pressures and government debt management challenges, the central bank faces a dilemma with limited policy options. It is expected that the policymakers’ balancing act will continue to be tested.