Technical factors contribute to wider spreads in longer dates G-Secs, what next?

The skew towards longer tenors likely reflects an anticipated moderation in banks’ demand for SLR securities.

By Namrata Mittal and Varnika Khemani 

India’s 10-year G-sec yield has risen by roughly 17–20 bps since July, despite ultra-benign inflation prints, contained crude prices, the absence of material exuberance in domestic growth, and no adverse global developments. The RBI’s shift to a neutral stance and the discontinuation of OMOs against a backdrop of ample liquidity may have contributed to this move. Market caution could also stem from weaker tax collections, though we believe both the Centre and the states have sufficient fiscal space to adhere to their stated deficit and borrowing targets. Today’s S&P rating upgrade has helped reverse part of the recent rise.

A notable driver of pressure on the long end has been elevated issuance of longer-dated State Development Loans (SDLs). FYTD, SDL supply has surged 37% year-on-year (April to early August), translating to around ₹87,000 crore more than the same period last year. The increase is particularly pronounced in Q2 FY26, with issuance running 35% higher year-on-year over the six weeks of July–August. Since July, about 65% of SDL issuance has been in maturities beyond 15 years—well above the historical 40–50% share. In particular, there has been a sharp jump in the 13–15-year and 20–25-year buckets, which together account for nearly half of total issuance.

The skew towards longer tenors likely reflects an anticipated moderation in banks’ demand for SLR securities. Anecdotal evidence also points to softer appetite from other long-term investors such as the NPS and insurers, with a greater tilt towards equities. The absence of RBI OMO purchases since June has further contributed to wider spreads at the long end.

On the fiscal side, Q1 FY26 data show a higher-than-usual deficit for states relative to historical norms, driven by softer receipts and front-loaded capex. Nevertheless, we expect full-year deficit and borrowing to remain within budgeted levels, with FY26 SDL issuance holding around the planned ₹12.4 trillion. That said, quarterly distribution suggests elevated supply until December 2025.

Spreads have widened notably in the 5–15-year segment and are running higher than their 3–5-year trend. However, there is scope for yields to moderate in the coming months. We see two potential catalysts:
(1) any further softening in growth could prompt additional RBI easing; and
(2) adjustments in issuance tenor could help contain upward pressure on yields.

(Namrata Mittal, Chief Economist and Varnika Khemani, Economist.)

Views are personal and do not represent the stand of this publication.