Short Description
India’s bond market presents a puzzle: home loans are now cheaper than government debt. This anomaly highlights serious fiscal and market pressures.
Read Time
3 minutes, 15 seconds
Main Article
In a striking reversal of financial norms, it is currently cheaper for an individual in India to take out a home loan than it is for the sovereign government to borrow money. While the State Bank of India offers mortgages around 7.25%, the yield on a 20-year government security (G-sec) has climbed to approximately 7.38%. This phenomenon, where risk-free sovereign debt is pricier than retail credit, signals deep-seated concerns within India’s debt market. The situation is made more unusual by the fact that G-sec yields have remained stubbornly high despite the Reserve Bank of India (RBI) cutting the policy repo rate by 1.25% since February 2025.
The core issue is a significant imbalance between supply and demand for government bonds. On the supply side, there is an oversupply of debt paper. The central government’s massive borrowing plan, alongside a 16% surge in state-level borrowing, is flooding the market. Furthermore, both central and state governments are issuing longer-maturity bonds, which naturally carry higher yields. On the demand side, traditional big buyers like insurance firms and pension funds are purchasing fewer bonds due to slower premium growth and regulatory shifts allowing more equity investment. This mismatch creates persistent upward pressure on borrowing costs.
This pressure persists despite India’s impressive headline fiscal deficit reduction. Markets are now focusing on the “general government” picture, which combines central and state finances. The collective deficit and a debt-to-GDP ratio nearing 85% raise sustainability questions, especially with states expanding populist spending. A critical risk is the narrowing gap between India’s nominal GDP growth and its borrowing costs. If global trade headwinds slow economic growth further, it could threaten the country’s debt dynamics, forcing investors to demand higher yields as compensation for perceived risk, thus keeping a floor under government bond rates.
Short Summary
India faces an unusual scenario where government borrowing costs exceed home loan rates, driven by an oversupply of bonds and weakened investor demand. Despite central fiscal discipline, combined state deficits and high debt levels are raising sustainability concerns. The key risk is that slowing economic growth could widen the gap with interest costs, keeping government security yields elevated.
