ECOSCOPE : The Economy Observer : G-Sec borrowings (2HFY27): Shifting toward longer tenors by Motilal Oswal Financial Services Ltd
* The 2HFY27 government borrowing calendar is broadly in line with expectations, with dated securities borrowing of INR7.86t. This takes FY27 gross borrowing to around INR16t, below the budget estimate of INR17.2t after accounting for switch operations. However, lower gross borrowing masks a higher net G-sec issuance of around INR6.3t in 2HFY27, compared with INR5.4t in 1HFY27, implying greater market absorption requirements in 2H. Net issuance is positive in every month, with relatively higher issuance expected during Oct’26, Dec’26 and Jan’27.
* The maturity profile is tilted toward the longer end. Securities with maturities of 15 years and above account for 46% of 2HFY27 borrowing, while the 30-50Y segment accounts for around 28% of total supply. In contrast, the 3-5Y segment accounts for around 19%. Weekly dated-securities auction sizes are also higher at INR330-360b, compared with INR280- 340b in 1HFY27. The calendar additionally provides for INR150b of sovereign green bond (SGrBs) issuance during 2HFY27, adding to the supply of long-duration securities.
* Short-term borrowing remains relatively contained. The 3QFY27 T-bill calendar envisages gross issuance of around INR2.99t and net issuance of INR297b. Net T-bill issuance for 9MFY27 is expected at around INR1.22t, broadly aligned with the FY27BE of INR1.3t. This suggests that the government's short-term borrowing requirement is unlikely to be a major additional source of pressure on the money market.
* While gross borrowing is lower than the budget estimate, higher net G-sec issuance and a relatively greater allocation toward 15-50Y securities could initially put pressure on the long end, leading to a modest bear-steepening after the sharp rise in shorter-tenor yields during Sep’26. However, stronger seasonal demand from insurance companies, pension funds and other long-duration investors, along with likely liquidity operations by the RBI, could limit the rise in long-term yields. We expect the curve to subsequently develop a flattening bias, as continued liquidity withdrawal, potential OMO sales and expectations of monetary-policy tightening put greater pressure on the front end. The sharp rise in global yields is an additional headwind, with the US (5.2%), the UK (5.4%) and Japanese (3.1%) 10Y yields having moved materially higher as the global rate-hike cycle gets underway.
* The domestic rate outlook has also become more challenging. We expect 3QFY27 inflation to remain above 6%, with El Niño-related weather risks, potential food-supply disruptions and higher input costs adding to inflation pressures. We expect the RBI to deliver a 25bp repo-rate hike in Oct’26. If crude oil prices remain above US$100/bbl, the cumulative ratehike cycle could extend to around 75-100bp, increasing the upside risk to bond yields. Against this backdrop, we expect the 10Y benchmark G-sec yield to trade in the 7.0-7.25% range during 2HFY27, with global yields, crude prices and domestic inflation remaining the key risks to the upper end of the range
2HFY27 borrowing broadly in line with expectations
* The central government plans to raise INR7.86t through dated securities in 2HFY27, spread across 23 weekly auctions from late Sep’26 to early Mar’27. Weekly issuance will range between INR330b and INR360b, compared with INR280-340b in 1HFY27. The program includes INR150b of SGrBs, while the RBI and the government retain flexibility to modify auction amounts, maturities and instruments depending on financing requirements and market conditions.
* Following switch operations earlier in the year, FY27 gross borrowing had already been cut to around INR16.2t, from the original budget estimate of INR17.2t. With the latest 2H calendar, however, full-year gross borrowing through dated securities is now estimated at around INR15.99t. Thus, the latest calendar implies a further modest reduction in gross supply. While this is supportive from a supply perspective, the impact should be assessed alongside net issuance, which is more relevant for the incremental stock of G-secs that the market needs to absorb.
Net G-sec supply will actually be higher in 2H
* Despite lower gross borrowing, the net supply of G-secs will increase in 2HFY27. Net G-sec issuance is estimated at around INR6.3t, compared with INR5.4t in 1HFY27 and INR4.8t in 2HFY26. Net issuance remains positive in every month, with relatively higher issuance expected during October, December and January.
* The government will also raise funds through Treasury Bills. The 3QFY27 program provides for INR2.99t of gross T-bill issuance, equivalent to ~INR23b per week, while net T-bill borrowing is estimated at ~INR297b. Including noncompetitive issuances during 1H, 9MFY27 net T-bill issuance is expected at around INR1.22t, close to the FY27BE of INR1.3t. The short-end supply will, therefore, remain relevant for money-market liquidity and RBI operations.
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