SGS volumes continue to remain at a fraction of G-Sec volumes despite large issuance, according to a report by Vedartha,the AIF & PMS brand under Bandhan AMC
In a clear sign that States are increasingly relying on market loans to finance deficits, State Government Securities (SGS) outstanding has surged roughly five-fold, far outpacing the 2.7x growth in Central government debt (via Government Security/ G-Sec) since FY15.
SGS volumes
However, SGS volumes continue to remain at a fraction of G-Sec volumes despite large issuance, according to a report by Vedartha,the AIF & PMS brand under Bandhan AMC.
“India’s State government debt is rapidly taking on a larger role in the country’s overall sovereign borrowing profile. SGS now account for a markedly higher share of sovereign issuances. Historically, the Central government’s borrowing far outstripped that of the States. But over the last decade, this gap has narrowed significantly,” per the report.
Annual State borrowings have climbed to about ₹12 lakh crore in FY2026E (estimated), and it is now approaching parity with Central government’s annual borrowings. In short, States are increasingly reliant on market loans to finance deficits, fundamentally altering the overall demand-supply dynamics of India’s bond market, per Vedartha’s assessment.
Along with the rising debt issuance, States are also shifting towards longer-dated borrowings. In FY26, the weighted-average maturity of SGS issuance is expected to be around 16 years, which was around 11 years in FY20, per the analysis. Over half of all issuances are in tenors beyond 10 years now.
“This extension is part deliberate and part opportunistic to manage refinancing risk as well as to lock lower yields in the current interest rate down-cycle for longer tenors” said Bhupendra Meel, Chief Investment Officer – Alternates (Fixed Income), Vedartha by Bandhan AMC.
The report noted that the combination of buy-and-hold ownership, larger issuance size and longer tenors, along with fragmented issuances and tenor buckets, is leading to persistent illiquidity and higher term premiums.
“SGS volumes continue to remain at a fraction of G-Sec volumes despite large issuance. These characteristics deter active traders, making SGS more suitable for long-term investors or roll-down strategies,” said the report. Investors must, therefore, emphasise on exit-liquidity, careful State/tenor selection and adequate spreads.
The report said the opportunities are most attractive for investors when yields are wide enough to compensate for underlying State credit risk-premium and liquidity constraints.
The Vedartha report recommended several policy reforms to address the aforementioned issues, including a primary proposal to create a single standardised yield curve for SGS, whereby the RBI could define 8-10 benchmark maturities for all States and mandate them to issue only in those common tenors.
The report also suggested strictly limiting new ISIN creation (for example, to 12 per State/year) to curb fragmentation. Further, a large majority of each State’s borrowing (example 60 per cent) should be done through reissuances of its benchmark securities, greatly reducing outstanding ISIN count over time.
To improve pricing transparency, the report urged mandatory credit ratings for every State; this will enable market participants to price State bonds more consistently, potentially via a published State credit spread index. State-specific credit ratings and credit premium indices is likely to push States towards more standardised budget reporting and fiscal disclosures.
Further, the report proposes structural consolidation: for instance, setting up a pooled SGS Consolidation Fund to buy back and merge small legacy issues and allowing structured switch auctions (swapping illiquid small ISINs for larger benchmark lines).
Published on February 24, 2026