Bond market participants are urging the government to increase short-term debt issuance as banking system liquidity hits a record high of over ₹10 lakh crore. With banks holding excess cash, traders hope a shift in the upcoming borrowing calendar will help absorb the surplus and stabilize yields.
As the government prepares its borrowing calendar for the second half of the fiscal year, a significant debate is unfolding between bond traders and policymakers. The banking system is currently holding a record liquidity surplus that has crossed the ₹10 lakh crore mark. This massive pile of cash, largely driven by strong foreign currency inflows, has left banks and treasury managers struggling to find enough places to park their money for returns.
To manage this situation, market participants are requesting that the government increase the supply of short-term debt instruments in its upcoming borrowing schedule. By issuing more short-duration bonds, the government could help absorb some of this excess cash and reduce the pressure on 10-year bond yields, which are often used as a benchmark for determining interest rates across the broader economy.
However, the government faces a balancing act. While traders are eager for short-term papers, large institutional investors like insurance companies and pension funds have a different requirement. These entities typically need long-term assets to match their own long-term liabilities, meaning they prefer the government to issue ultra-long-duration bonds.
For the current fiscal year, the government has set a gross borrowing target of ₹16.09 lakh crore, with ₹7.89 lakh crore earmarked for the October-to-March period. Treasury officials are currently in consultations to finalize how this will be borrowed. Recent data shows that the government has already been shifting its strategy, with short-duration bonds accounting for a larger portion of total borrowing in the first half of the year compared to the previous period.
Investors are now watching for the official release of the borrowing calendar, which is expected later this month. This schedule will provide clarity on the government's debt strategy and is a key factor that market participants will weigh ahead of the Reserve Bank of India’s next monetary policy decision, scheduled for October 7.