Record levels of state government borrowing neutralize central bank interest rate cuts and drive up corporate financing costs in India
Record state borrowing in India is distorting the yield curve and raising corporate costs. This trend prevents recent rate cuts from reaching the economy.
Insights:
In India 
IN, a significant structural mismatch between monetary policy and market realities has emerged. Despite the Reserve Bank of India (RBI) implementing interest rate cuts totaling 100 basis points during the current fiscal year, borrowing costs across the economy have failed to decrease. Instead, the yield for the India 10-Year Government Bond has risen by 10 basis points, and benchmark yields for top-rated corporate entities have increased by 30 basis points. This failure in monetary policy transmission is largely attributed to a record surge in state government bond issuance that is absorbing liquidity and crowding out federal debt.
IN, a significant structural mismatch between monetary policy and market realities has emerged. Despite the Reserve Bank of India (RBI) implementing interest rate cuts totaling 100 basis points during the current fiscal year, borrowing costs across the economy have failed to decrease. Instead, the yield for the India 10-Year Government Bond has risen by 10 basis points, and benchmark yields for top-rated corporate entities have increased by 30 basis points. This failure in monetary policy transmission is largely attributed to a record surge in state government bond issuance that is absorbing liquidity and crowding out federal debt.
