The supply of G-Secs State Govt Secs has increased significantly in FY26: FSR

The report noted that the Treasury yield curve was steepening, driven by monetary easing and declining inflation expectations Photo credit: istock.com

However, demand for long-term government bonds among the largest investors – commercial banks, insurance companies and pension funds – has declined.

“Even as banks accumulate more SGS and scale back their G-Sec, insurance and pension funds have shown a shift towards equity exposure,” said the report, a biannual publication with contributions from all financial sector regulators.

The supply of G-sec and SGS, both high-quality liquid assets (HQLAs), has increased from ₹13.56 lakh crore in 2021-2022 to ₹17.93 lakh crore in 2024-2025. In addition, SGS’s share increased from 36 percent of the total number of HQLAs issued in 2021-22 to 42 percent in 2024-25.

The total debt ratio remains around 82 percent. According to the FSR, this is largely due to the high national debt.

Moreover, states’ committed expenditures remain high at around one-third of revenue expenditures, meaning their market borrowings are likely to remain high, along with returns on their debt.

Steeper yield curve

The report noted that the government bond yield curve was steepening, reflecting monetary easing and declining inflation expectations.

“Short-term rates continued to decline following the RBI’s rate cuts and accommodative liquidity conditions, while long-term rates remained under pressure due to sustained supply. As a result, term spreads widened and remained elevated,” the report said.

Impact on banks’ revenues

The FSR noted that the share of other operating income (OOI) in the bank’s total income has increased over the years, with income from treasury operations emerging as a significant source of other operating income, especially in the last two quarters.

It warned that the current steepening yield curve and relatively higher exchange rate volatility, if sustained, could impact government bond income.

Even as risk profits associated with net interest income (NII) have not changed significantly since the last FSR, the overall impact on banks’ profits could be greater going forward.

According to the report, the steepness of the yield curve also illustrates that embedded future interest rates are much higher.

Published on December 31, 2025