Is the Indian debt market pricing risk accurately? Consider the scenario. Over the past year, while short-term interest rates have fallen, long-term central government bond yields have been almost flat. In contrast, borrowing costs for states have risen sharply. State governments are now, in fact, paying as much as AAA rated corporates. This, however, isn’t the only quirk. Home-loan borrowers are barely paying a higher rate than governments. Something seems amiss.

Let’s take a step back. In February 2025, the RBI’s Monetary Policy Committee began to cut interest rates. By the end of the year, the repo rate had fallen by 125 basis points — from 6.5 per cent to 5.25 per cent. This reflects in the shorter-term borrowing rates. In January 2025, just before the MPC cut rates, the 91-day Tbill yield was hovering around 6.54 per cent. By February this year, it had fallen to 5.28 per cent.

Long-term rates have, however, remained elevated. The 10-year GSec yield, which was around 6.7 per cent in January last year, and had declined to 6.16 per cent in May, rose thereafter. In February this year, yields have been hovering just shy of 6.7 per cent. This period has also........

© Indian Express