The latest data from the Reserve Bank of India (RBI) reveals that the outstanding stock of central government bonds, excluding special securities, has surpassed the ₹100-lakh-crore mark. This significant increase in government borrowing is a result of the Covid crisis and the government’s efforts to revive the economy through increased state spending. In the year 2020, the Centre’s bond issuances in a single financial year crossed ₹10-lakh-crore for the first time. However, despite the Centre’s commitment to reducing the fiscal deficit, the heavy redemptions of previously issued bonds are expected to keep the gross borrowing elevated.
The government’s gross market borrowing is determined by the sum of net borrowing, which is used to finance the fiscal deficit, and borrowings made to repay earlier debt issuances. While there is a concerted effort to reduce the fiscal deficit and adhere to the fiscal consolidation roadmap, the redemption of previous borrowings will likely offset the reduction in gross borrowing. Therefore, it is expected that the fiscal deficit in the coming year could be closer to 5.5% of GDP or slightly lower.
In the upcoming financial year, government bonds worth ₹3.86 lakh crore are set to mature, while bonds worth ₹5.27 lakh crore are scheduled for maturity in FY26. Despite the high borrowing programme, demand for government bonds remains resilient, especially for long-term bonds. The auction of a 50-year bond by the government for the first time witnessed robust demand from insurance companies, who have been requesting longer-maturity sovereign bonds to match their long-term liabilities. It is worth noting that government bonds are considered risk-free investments.
The introduction of the 50-year bond is seen as a welcome step by the RBI, as it fulfills the demand from insurance companies. The bond was subscribed at a low spread to the 10-year g-sec, indicating strong demand. The cutoff yield for the 50-year bond was only 14 basis points higher than that on the 10-year bond auction, which is unusually low. The bond received bids worth more than four times the notified amount of ₹10,000 crore.
In conclusion, the outstanding stock of central government bonds in India crossing the ₹100-lakh-crore mark is a reflection of the significant increase in government borrowing since 2020. Despite efforts to reduce the fiscal deficit, previous bond redemptions will likely keep gross borrowing elevated. The upcoming maturities of government bonds highlight the government’s high borrowing programme. However, demand for government bonds remains strong, especially for long-term bonds, indicating confidence in risk-free investments.
