India’s central bank said on Thursday that the federal government has conducted a sizable bond switch operation, buying back securities maturing in the next fiscal year and issuing longer-dated debt due in 2040, as part of a broader strategy to manage refinancing risks ahead of record borrowing.
Under the operation, the government repurchased 755.04 billion rupees ($8.34 billion) of four securities maturing in the financial year 2026–27 from the Reserve Bank of India (RBI). In exchange, it issued 694.36 billion rupees of the 8.30% Government Security 2040.
The 2040 bond was issued at a price of 110.45 rupees, implying issuance above par, while the buyback prices of the shorter-maturity bonds ranged between 100.28 rupees and 102.46 rupees. The price differentials reflect prevailing yield conditions across the curve and investor demand for duration.
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Switch operations are a standard debt management tool that allows sovereigns to smooth out redemption spikes. By replacing shorter-dated bonds with longer-term securities, the government spreads repayment obligations over a longer period, lowering rollover risk and reducing the likelihood of yield volatility tied to concentrated maturities.
Debt Profile Management and Yield Curve Implications
The current switch exceeds the amount originally budgeted for such operations, signaling a proactive stance toward liability management. India faces significant redemptions in 2026–27, and large, clustered repayments can create funding pressure if not carefully managed.
By extending the duration to 2040, the government pushes part of its repayment burden more than a decade into the future. This helps flatten redemption peaks and supports stability in the government securities (G-Sec) market, which serves as the benchmark for pricing corporate debt and other financial instruments.
Issuing longer-dated paper also influences the sovereign yield curve. Increased supply at the long end can exert upward pressure on long-term yields if investor demand is insufficient. However, orderly switch operations — particularly those coordinated with the RBI — can mitigate abrupt market reactions.
India’s domestic bond market is largely supported by institutional investors such as banks, insurance companies, and pension funds, which often have an appetite for longer-duration assets to match long-term liabilities. The 8.30% coupon on the 2040 bond reflects compensation for duration risk in an environment where global interest rates remain elevated relative to the post-pandemic lows.
The pricing of the 2040 bond at 110.45 rupees indicates that the coupon is above prevailing market yields for comparable maturities, resulting in issuance at a premium. Such pricing dynamics are common when governments reopen or issue benchmark securities.
Record Borrowing and Fiscal Strategy
In her February 1 budget speech, Finance Minister Nirmala Sitharaman announced that New Delhi plans to borrow a record 17.2 trillion rupees in fiscal year 2026–27. That represents an increase of about 17% over the current fiscal year’s borrowing of 14.61 trillion rupees.
The expanded borrowing programme reflects ongoing capital expenditure commitments, infrastructure spending, and fiscal consolidation goals balanced against revenue constraints.
A senior finance ministry official told Reuters earlier this month that the government would deploy a mix of instruments — including bond switches and other liability management exercises — to ensure the record borrowing does not destabilize markets or push yields sharply higher.
Managing borrowing costs is critical because rising yields directly increase debt servicing expenses, which already account for a significant portion of India’s annual budget. Sustained upward pressure on yields could crowd out private investment or complicate fiscal deficit targets.
The switch also sends a signal to investors that authorities are actively managing the maturity profile rather than relying solely on fresh issuance. Such measures can enhance market confidence, particularly as India integrates more deeply into global bond indices and attracts foreign portfolio flows.
In the broader macroeconomic context, India’s debt strategy must balance growth financing needs with long-term sustainability. The government reduces short-term refinancing risk while locking in funding across a longer horizon by smoothing redemption pressures and extending maturities.