State borrowing is about to get heavier, and the bond market is already feeling it. The RBI’s calendar of 1 October puts state and UT market borrowing for October–December 2026 at ₹360,820 crore. ICRA says that is 25.9% above the ₹2.9 trillion raised in the same quarter last year, and about ₹2.3 trillion net of ₹1.3 trillion in redemptions.
Why does this matter beyond state finance? State Development Loans (SDLs) compete with central government securities for the same buyers: banks, insurers, provident funds, and mutual funds. When SDL supply swells, especially at longer maturities, investors want extra yield to absorb it. That lifts term premia and can push yields up across the curve without any move in the repo rate. Going through RBI’s annexes, at least 60% of the quarter’s borrowing is already pencilled in for maturities of 11 years or longer. Here is where the supply lands, what auctions show so far, and what to watch.
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How Big is the Q3 FY27 SDL borrowing calendar
| Quarter | Indicative state borrowing |
| Q3 FY26 (Oct–Dec 2025) | ₹2.81 trillion planned; ~₹2.9 trillion raised |
| Q1 FY27 (Apr–Jun 2026) | ₹2.54 trillion |
| Q2 FY27 (Jul–Sep 2026) | ₹3.19 trillion |
| Q3 FY27 (Oct–Dec 2026) | ₹3.61 trillion |
Sources: RBI; ICRA; Business Standard
- Concentrated. Maharashtra (₹52,800 crore) and Tamil Nadu (₹48,000 crore) are the two biggest borrowers, together accounting for about 28% of the quarter. Against last year, Maharashtra, West Bengal, and Haryana make up nearly 70% of the ₹742 billion increase.
- Back-loaded. The calendar adds up to about ₹1.06 trillion in October, ₹1.14 trillion in November, and ₹1.41 trillion in December. December is about 39% of the quarter, spread over five auctions.
- Benchmark-driven. 26 states and UTs now follow the RBI’s Benchmark Issuance Strategy (BIS), about 77% of planned borrowing. They plan ₹277,820 crore, issued into pre-announced maturity buckets.
Where the Supply Lands on the Curve
| Maturity bucket | Planned amount (₹ crore) | Share of BIS issuance |
| 2–5 years | 15,900 | 5.7% |
| 6–10 years | 42,800 | 15.4% |
| 11–15 years | 66,420 | 23.9% |
| 16–20 years | 67,600 | 24.3% |
| 21–25 years | 50,500 | 18.2% |
| Above 25 years | 34,600 | 12.5% |
Source: RBI Annex 1 (BIS states only); shares calculated
Nearly 79% of BIS issuance is 11 years or longer, about 55% is beyond 15 years, and roughly 31% is beyond 20. The two heaviest buckets, 11–15 and 16–20 years, together take about 48%.
The remaining ₹83,000 crore belongs to Tamil Nadu (₹48,000 crore), Karnataka (₹20,000 crore) and Gujarat (₹15,000 crore). Their annex gives amounts and dates but no maturities. Counting those as unknown, the floor for the whole quarter is at least 61% in 11 years or longer and at least 42% beyond 15 years.
States like long tenors because they reduce refinancing risk. But long-dated supply meets a limited pool of natural buyers, mainly insurers and pension funds.
Crowding Out and Term Premium
Picture a vegetable market with a fixed number of customers. If twice as many farmers show up with tomatoes, prices fall unless more buyers arrive. Bonds work the same way: more state paper means the same investors must be paid more to hold it.
A term premium is the extra yield for locking money away for ten years rather than rolling over short-term bonds. If a one-year bond pays 6% and a ten-year pays 7%, part of that extra 1% is compensation for uncertainty, including supply gluts. Heavier long-dated issuance raises that premium.
What Recent Auctions are Telling Us
The market has already started repricing:
- The weighted average SDL cut-off rose from 7.54% on 11 August to 7.93% on 29 September.
- The weighted spread widened from +49 bp on 28 July to +72 bp on 15 September and stood at +64 bp on 29 September (on RetailBonds.in’s own G-sec curve).
- On 15 September, states raised ₹34,645 crore at a bid cover of only 2.1x, the weakest of the last twelve auctions.
- The 29 September auction matched the planned pattern: spreads were widest, about +77 to +84 bp, for 12–18 year papers and thinner beyond 19 years.
- The 10-year benchmark (6.94% GS 2036) closed at 6.97% in early September. Retail Bonds’ curve now shows roughly 7.1–7.2% for 10-15-year maturities. A year ago, the 10-year trade was between 6.51% and 6.60%.
For perspective, ICRA’s 10-year spread measure widened to 77 bp in late July. The FY12–FY19 average was around 45 bp. Supply isn’t the only driver of yields, but it is clearly part of the story.
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What Could Soften the Impact
- A smaller center. ICRA notes that the government has cut its planned H2 market borrowing by nearly ₹1.2 trillion to ₹7.86 trillion in dated securities.
- Benchmark discipline. The first nine BIS states raised ₹3.31 trillion in H1 against ₹3.26 trillion indicated, and the next ten raised 92% of their indicated amount. Predictable supply is easier to price.
- Calendar flexibility. The RBI can adjust auction dates and amounts in consultation with states.
Risks remain. FPIs sold ₹9.2K crore of FAR bonds in September, ending a five-month buying streak. ICRA also projects Q4 gross state issuance of ₹4.8–5.4 trillion, so the pipeline doesn’t thin in January.
What Should Bond Investors Watch Through December
- The opening auctions. The quarter starts on 6 October with ₹25,100 crore, and 13 October (₹31,200 crore) is the heaviest of the first four.
- The peak weeks. The weeks of 23 November (₹33,550 crore) and 22 December (₹33,300 crore) are the biggest single-week supplies.
- Bid cover and spreads together. Weak bid cover with widening spreads, as on 15 September, is the warning pattern.
The Bottom Line
The ₹3.6 trillion SDL calendar is a supply story more than a policy story. It is larger than last year, back-loaded into December and skewed to maturities beyond ten years, while the buyer base for long-dated paper can’t expand overnight. The Centre’s smaller H2 program and the BIS framework help, but until demand catches up, expect spreads and term premia to stay under pressure.
Frequently Asked Questions
SDLs compete with central government securities and other fixed-income assets for investors’ money. If supply increases faster than demand, investors may demand higher yields to absorb the additional bonds.
It can contribute to upward pressure on yields, particularly where new supply is concentrated. However, government borrowing is only one factor; inflation, monetary policy, global yields, liquidity and investor demand also influence the yield curve.
Term premium is the additional compensation investors may demand for holding a longer-duration bond instead of repeatedly investing in shorter-term securities. Supply, inflation uncertainty, interest-rate expectations and fiscal risks can all influence it.
The Benchmark Issuance Strategy is an RBI framework under which participating states pre-announce borrowing in specified maturity buckets. The objective is to create more predictable and standardised SDL issuance.
Crowding out occurs when heavy borrowing by one segment competes for a limited pool of investor funds. If state borrowing rises significantly, investors may demand higher yields from SDLs and potentially from other bonds competing for the same capital.
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