Indian investors are facing a heavy supply of government and state-run debt, as multiple states and central government-owned entities plan to raise an aggregate of 492 billion rupees ($5.49 billion) in a single day. This move comes at a time when the domestic debt market is already struggling to absorb central government securities.

Market Supply Overhang

Nikhil Aggarwal, founder and CEO of Grip Invest, noted that:

“The domestic market is seeing higher supply from PSU companies and state governments, causing a demand-supply mismatch. Investors will demand higher yields to cushion liquidity risks amid uncertainty about RBI policy stance.”

State governments aim to raise more than 332 billion rupees, approximately 25% above the planned calendar, while Power Finance Corporation is targeting 60 billion rupees, and Bank of India plans to issue 100 billion rupees through infrastructure bonds.

Rising Yields and Liquidity Concerns

Yields across fixed-income assets have surged since the Reserve Bank of India (RBI) cut the policy repo rate on December 5. Most investors now anticipate that the rate easing cycle has ended, resulting in higher yields:

• 10-year benchmark government bond yields are up over 20 basis points since December 5.
• State and AAA-rated corporate bond yields have increased 20–25 basis points.

Gaura Sen Gupta, chief economist at IDFC First Bank, highlighted the softness in investor demand:

“Pensions and insurance funds have led to weaker demand for ultra-long bonds, impacting the market.”

Supply-Demand Imbalance Ahead

Market attention is shifting toward the next financial year, where a sharp rise in redemptions for both government securities and state bonds is expected, keeping gross supply elevated. Investors, including private-sector banks and mutual funds, are also moving to lower-duration exposure, further reducing appetite for long-dated papers.

This combination of high supply, rising yields, and shifting investor preferences underscores the challenges Indian authorities face in balancing debt market stability while funding infrastructure and state development projects.