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Informist, Friday, Jun. 19, 2026

 

By Cassandra Carvalho

 

MUMBAI – Amid elevated yields and seasonally low supply, foreign portfolio investors' holdings of state government bonds have jumped fivefold in the past two weeks after the Reserve Bank of India and the Centre announced measures to encourage foreign investors to purchase government bonds. 

 

FPIs held state bonds worth INR 22.40 billion Friday, more than five times their holdings of INR 4.17 billion on Jun. 4 — the day before the Centre removed withholding and capital gains tax on FPIs' bond buys – as per data from Clearing Corp. of India. The largest purchase was made for INR 5 billion in Chhattisgarh’s 7.00%, 2029 bond. About half of these papers have maturities of up to 2031, amounting to 82% of the INR 22 billion.

 

"We have received increasing queries from FPIs for state bonds after the taxation benefits have been announced," a dealer at a primary dealership said. "As FPIs are moving from underweight to even-weight on the Indian bond market, yields have already come down sharply, so the fresh investors are hoping for a yield pickup and trying to pick up stock (of state bonds)." 

The rush for state bonds comes amid unusually high yield spreads of these securities over central government bonds. The June quarter usually sees spreads compress due to lower supply than the previous quarter. This quarter was an anomaly due to the war in West Asia, making current yields attractive for investors to buy, dealers said. The average spread of states' 10-year bonds at auction has been 74 basis points over the 10-year benchmark gilt so far this quarter, nearly double that of 39 bps seen in the year-ago quarter, according to data compiled by Informist.

 

Supply has also been manageable this quarter, with state bond issuances at INR 1.86 trillion so far. The borrowing is likely to undershoot the states' indicated borrowing of INR 2.55 trillion for the quarter, and is sharply down from INR 5.23 trillion borrowed in Jan-Mar. States borrowed INR 2.01 trillion via bond issuances in the June quarter last year.

 

While FPI demand has been concentrated in short-term state bonds, insurance companies have also been rushing to lock in attractive yields, maximising their returns through bond forward rate agreements. State bond forward rate agreements totalled INR 10.12 billion between Jun. 1 and Jun. 8, according to the latest data available from CCIL.

 

A fall in overnight indexed swap rates this month has increased returns on bond forwards and forward rate agreements as the cost of hedging has reduced, dealers said. The five-year OIS rate is down 27 bps in June as crude oil prices have slumped and the US and Iran have come close to ending hostilities. Swaps may rise in the coming months as the RBI's Monetary Policy Committee is likely to raise the repo rate, making current levels good to lock in by paying fixed rates, dealers said.

 

"Earlier, people used to go (for FRA) in G-sec, but now state loans have been allowed and yields are very attractive," a dealer at an insurance company said. "It's good, people are getting 8% plus returns if they're doing FRA for a five-year bond, so insurance companies are also doing state loan FRA."

 

Some insurance companies have been purchasing state bonds maturing in 10 to 15 years, instead of the usual 20-30-year segment, due to attractive yields, as bank demand is concentrated in short-term bonds, dealers said. However, most domestic traders do not favour state bonds, with supply expected to pile up in Oct-Mar and higher expenses due to the war in West Asia likely to eat into states' finances. S&P Global Ratings said earlier this month that even wealthier Indian states, which will grow faster than the rest of the country, will need to borrow more to increase investments. 

 

"Supply in state bonds is still a problem. If you look at the fiscal deficit on a consolidated basis for the states, it's still on the higher side," a dealer at another insurance company said. "Overall demand for G-sec in the longer tenor is very limited. Now, given the higher supply in the states, for the longer-period securities, the capital gains are already capped there. I would rather go for a GOI (government of India) serviced bond in the corporate segment, where liquidity will be there."  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

With inputs from Aaryan Khanna

Edited by Saji George Titus

 

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