Bank of America trader warns India state debt deluge will worsen

India must find ways to reduce borrowings by its provinces as a record issuance by them will weigh on bonds and keep interest rates high, according to a veteran trader at Bank of America Corp.

States are likely to borrow 4.5 trillion rupees ($50.2 billion) in the three months through March, a 60% jump over the current quarter, according to estimates by Vikas Jain, head of India fixed income, currencies and commodities trading. That puts them on course to hit a record supply in the fiscal year that ends March 2026.

“The state bond supply is definitely going to increase sharply and that’s why real money investors are not ready to commit a significant amount of investment at this point in time,” Jain said in an interview. “The market is a bit concerned about that.”


Gross borrowings by Indian states have jumped almost 20% this fiscal year from 2024 as growth in tax revenues slowed, while they beefed up spending. Demand for these bonds is weak and investors want a premium for absorbing the glut, lifting borrowing costs not just for states but also the federal government. The heavier issuance risks crowding out private borrowers, raising funding costs for banks and companies.

India’s 10-year bond yield rose to a nine-month high of 6.68% on Monday as states announced a larger-than-scheduled bond auction for the week. That prompted India’s state-owned utilities firm Power Finance Corp. to scrap its bond sale on Tuesday.

A large supply, particularly of the longer-duration debt, “is hampering the overall transmission of rate cuts in the bond market and the economy,” Jain said.

Despite 125 basis points of rate cuts by the Reserve Bank of India this year, India’s benchmark 10-year bond yield has eased just 13 basis points, while that on the top-rated company bonds has climbed over 11 basis points. The yield on state bonds has risen sharply in recent months, widening their spread over the federal debt to around 40 basis points, according to data compiled by Bloomberg.

For a comparable borrowing, state bonds find far fewer takers as global investors and foreign banks avoid exposure to illiquid debt, while domestic players too have limits for investing in such bonds, Jain said. “With a limited number of buyers, the spreads will continue to widen.”

Gross state borrowing may rise to as much as 13.5 trillion rupees in the next fiscal year, from an estimated 12 trillion rupees this year, Jain said. He expects the supply to surpass the federal net borrowing of 11.5 trillion rupees this year if one adjusts for bond purchases by the central bank.