India plans increased bond buybacks and switches to secure sovereign rating upgrades

Synopsis

India is likely to increase bond buybacks and switches to longer maturities this fiscal year to lower its combined fiscal deficit, aiming for sovereign rating upgrades that have remained unchanged for nearly two decades. Economists suggest that maintaining the fiscal gap below 7% of GDP is crucial for rating agencies to consider an upgrade, with the government budgeting ₹2.

Mumbai: The quantum of bond buybacks and switches in favour of longer maturities would increase in this fiscal year , economists told ET, as India would likely consider restraining its combined fiscal deficit to help secure upgrades to sovereign ratings that remain unchanged for nearly two decades.

Switching shorter-maturity bond tenures in favour of longer redemptions and bigger buybacks should hold down the existing 7% combined fiscal gap of the states and the Centre, economists said. A fiscal gap below that threshold is necessary for global rating companies to consider an upgrade.

"This year, our combined (center + state) fiscal deficit as a percentage of GDP will be below 7%, but the key question is if it will remain below 7% from FY27 onwards," said Anubhuti Sahay, head of India economic research at Standard Chartered Bank.

Moody's, S&P and Fitch have kept India's rating unaltered since at least 2007, or a period predating the global financial crisis.

Agencies

Bonds maturing in FY27 are more than double versus this year at ₹6.48 lakh crore, and are consistently high until 2032. The government has also budgeted ₹2.5 lakh crore for bond switches this year, 60% more than the previous year.

In a bond switch, the government replaces bonds maturing in the near term with long term debt.

A consistent narrowing of India's fiscal deficit, specifically a combined gap below 7% of the GDP, is a key trigger for S&P Global to consider upgrading the country's sovereign rating. S&P currently assigns a rating of BBB- with a positive outlook. Cautious fiscal and monetary policy could lead to an improvement in ratings over the next two years, S&P said in May last year.

Longer Tenures
Along with buybacks, the Centre has budgeted switches worth ₹2.5 lakh crore for FY26, from ₹1.5 lakh crore last year.

"The RBI will have to continue with switches because of the redemption burden, which doubles in FY27 and remains elevated until FY 32. Bonds would then have to be switched with securities maturing after FY32," Sahay said.

The surplus dividend transfer by the RBI of ₹2.69 crore in late May also helped the government conduct g-sec buybacks. However, these buybacks would be constrained by the amount of surplus the government has, economists said.

"The Centre restarted buybacks of g-secs maturing in FY27 with an aim to reduce redemption pressure in FY27. The RBI also recently did a switch with the government for g-secs maturing in FY27. The government cash surplus is substantial post the RBI dividend and we could expect more such buybacks," said Gaura Sen Gupta, chief economist at IDFC First Bank.

The RBI, on behalf of the government, conducted buybacks worth ₹2.95 lakh crore in FY25. Similarly, the RBI also conducted bond switches worth ₹2.01 lakh crore in the same time, replacing most bonds with securities maturing after 2032 due to high redemptions throughout. The first buyback of FY26 happened on Thursday for a notified amount of ₹25,000 crore.

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