The spread between the 10Y government bond yield and its comparative state development loans widened in Dec on account of higher debt supply. The spread widened to as much as 38 bps as against 29 bps in the previous month, but still remained lower than same time last year (46 bps). The RBI released the borrowing calendar of state development loans for the ongoing quarter – and the supply was set at INR 4.73tn (as against market expectations of around INR 4.2-4.3tn, and 4.13tn in Q4 FY24). The SDL supply has always remained elevated in the last quarters as seen in the past trends, though the actual borrowing has been lower than scheduled. We expect the spreads to widen further in the Jan-Mar quarter given heavier supply as seen below.
