Supply of G-Secs State Govt Secs has risen considerably in FY26: FSR

The report noted that the sovereign yield curve steepened, driven by monetary easing and declining inflation expectations
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Supply of Central Government Securities (G-Sec) and State Government Securities (SGS) has seen a significant rise, with net issuances for both surpassing last fiscal year’s levels, as per the latest Financial Stability Report (FSR).

Despite this increase, major institutional investors—including scheduled commercial banks, insurance firms, and pension funds—have reduced their exposure to long-term sovereign debt.

“While banks are accumulating more SGS while reducing G-Sec holdings, insurance and pension funds are increasingly favoring equity investments,” stated the report, a collaborative publication involving all financial regulatory bodies.

Combined issuance of G-sec and SGS—both classified as high-quality liquid assets (HQLAs)—climbed from ₹13.56 lakh crore in 2021-22 to ₹17.93 lakh crore in 2024-25. State government securities now constitute 42% of total HQLAs issued in 2024-25, up from 36% in 2021-22.

The aggregate debt-to-GDP ratio remains elevated at approximately 82%, primarily due to higher debt levels among state governments.

Notably, states’ committed expenditures—accounting for one-third of their revenue outlays—continue to pressure borrowing requirements and debt yields.

Yield Curve Dynamics

The sovereign yield curve experienced steepening amid monetary policy easing and moderated inflation projections, according to the report.

“Short-term rates decreased following RBI rate cuts and improved liquidity, while long-term yields faced upward pressure from sustained supply. This divergence widened term spreads considerably,” it explained.

Bank Earnings Implications

The FSR highlighted a growing dependency on other operating income (OOI) in banks’ overall earnings, particularly treasury-generated income over recent quarters.

It warned that prolonged yield curve steepening and heightened exchange rate volatility could adversely affect treasury profits.

While risks to net interest income (NII) remain stable, banks’ overall earnings resilience may face challenges if these conditions persist.

The report further noted that the yield curve’s steepness reflects elevated market expectations for future forward rates.

Published on December 31, 2025