Early signs of fiscal stress

FIRMING TREASURY YIELD WARRANTS A RELOOK AT THE FISCAL ARITHMETIC

- RENU KOHLI

SINCE EARLY FEBRUARY, banks have been flush with surplus liquidity—so much so that more than ₹3 lakh crore is being parked at the Reserve Bank of India’s (RBI) Standing Deposit Facility (SDF), pushing the tri-party repo rate below the SDF rate (5%).

Since December 12, 2025, it is creating market perceptions of “shadow easing” beyond the 125-basis-point (bps) policy rate cut since February 7, 2025, largely due to the RBI’s durable liquidity infusion exceeding ₹6.5 lakh crore—₹4.2 lakh crore open market operations and ₹2.3 lakh crore ($25 billion) of buy/sell FX swaps. Strangely though, there’s been an insignificant impact upon long-term yield—the 10-year benchmark G-sec is trading at 6.77% currently, almost same as at the start of this easing cycle last year (see graph). The 10-year yield that fell to 6.26% at end-May 2025 climbed back to 6.77% last week, nearly 50 bps higher and steepening the yield curve.

More disturbing is the sharper rise in the 10-year state government securities yield—for example, Tamil Nadu’s weighted average yield touched 7.44% on February 17, almost 80 bps higher than 6.65% eight months ago (June 10, 2025).