Households in Picture to Restrain Debt Totaling ₹29.7 Lakh Crore

The debt under the PM Narendra Modi-led government stands at $346 billion and the centre is expected to seek help from the country’s households.

Shockingly, sovereign bonds worth 29.7 trillion rupees ($346 billion) are set to mature in the next five years, as the centre issued these bonds during the pandemic. Therefore, to tackle the ballooning risk, the Reserve Bank of India and the government are swapping maturing debt with longer-dated notes.

Notably, refinancing debt auctions are gaining momentum due to heightened investment activity by households as they have been infusing money into insurance companies, which in turn are buying heaps of long-dated sovereign bonds. In fact, the demand for such bonds is so great that the head of Life Insurance Corp. of India, the nation’s largest, even floated the idea of issuing a 100-year paper.

“Households are looking to deploy their savings pool in instruments that provide a longer-term investment horizon than the conventional banking system,” says Soumyajit Niyogi, director at India Ratings, a unit of Fitch Ratings.

The finance ministry is set to swap debts amounting to 2.5 trillion rupees for the fiscal year starting from April 1. As the insurance sector is expanding at 12-13% annually, the goal seems to be within reach, said Vidya Iyer, head of fixed income at ICICI Prudential Life Insurance.

As per the government data, the debt swap strategy paid off last year. In the September quarter, the average yield on new issuances eased by 20 basis points to 6.9%, while their maturity stretched to 20.5 years.

Insurance companies have piled into these switch operations, said Ajit Banerjee, chief investment officer at Shriram Life Insurance Ltd. He said that depending on the shortage of quality long-term debt papers in the market, the demand for sovereign notes will continue to remain in place. As of now, the government has packed 38% of its debt sales in bonds maturing in 30 years or more, up from 25% four years ago. Centre is planning to announce its borrowing plan for the April-September period this week.