Mumbai, Feb 24: India’s state government debt is rapidly taking on a larger role in country’s overall sovereign borrowing profile. A recent report by Vedartha, the AIF & PMS brand under Bandhan AMC, ‘The Changing Face of State Borrowings’, notes that State Government Securities (SGS) now account for a markedly higher share of sovereign issuances. Historically, the Central Government’s borrowing far outstripped that of the states. But over the last decade, this gap has narrowed significantly. Since FY2015, SGS outstanding has surged roughly five-fold, far outpacing the ~2.7x growth in central government debt. Annual state borrowings have climbed to about ₹12 lakh crore in FY2026E, and it is now approaching parity with central government’s annual borrowings. In short, states are increasingly reliant on market loans to finance deficits, fundamentally altering the overall demand-supply dynamics of India’s bond market.
Along with the rising debt issuance, states are also shifting towards longer-dated borrowings. The report finds that in FY2026, the weighted-average maturity of SGS issuance is expected to be around 16 years, which was around 11 years in FY20. Over half of all issuances are in tenors beyond 10 years now. “This extension is part deliberate and part opportunistic to manage refinancing risk as well as to lock lower yields in the current interest rate down-cycle for longer tenors” said Bhupendra Meel, Chief Investment Officer – Alternates (Fixed Income), Vedartha by Bandhan AMC.
The change in states issuance dynamics has clear implications for investors. The report notes that the combination of buy-and-hold ownership, larger issuance size and longer tenors, along with fragmented issuances & tenor buckets is leading to persistent illiquidity and higher term premiums. SGS volumes continue to remain at fraction of G‑Sec volumes despite large issuance. These characteristics deter active traders, making SGS more suitable for long‑term investors or roll‑down strategies. Investors must therefore emphasize on exit-liquidity, careful state/tenor selection and adequate spreads. The opportunities are most attractive for investors when yields are wide enough to compensate for underlying state credit risk-premium and liquidity constraints.
Looking ahead, the Vedartha report recommends several policy reforms to address these issues. A primary proposal is to create a single standardized yield curve for SGS: the RBI could define 8–10 benchmark maturities for all states and mandate states to issue only in those common tenors. The report also suggests strictly limiting new ISIN creation (for example, to 12 per state per year) to curb fragmentation. To improve pricing transparency, it urges mandatory credit ratings for every state; this would enable market participants to price state bonds more consistently, potentially via a published state credit spread index. State specific credit ratings and credit premium indices would likely push states towards more standardized budget reporting & fiscal disclosures. Crucially, the report proposes structural consolidation: for instance, setting up a pooled “SGS Consolidation Fund” to buy back and merge small legacy issues, and allowing structured switch auctions (swapping illiquid small ISINs for larger benchmark lines). They even recommend that a large majority of each state’s borrowing (e.g. 60%) be done through reissuances of its benchmark securities, greatly reducing outstanding ISIN count over time.
These measures – a unified SGS yield curve, credit-risk differentiation, and aggressive consolidation – are aimed at deepening the state-securities market and increasing the liquidity. In all, the analysis underscores that SGS are no longer a “quiet” segment of borrowing. Investors should be aware of the higher supply, term premiums, illiquidity in state bonds and adjust portfolio strategies accordingly. As articulated in the Vedartha report, it is important to recognize this shift and initiate comprehensive policy reforms for building a resilient sovereign bond ecosystem.
