States have significantly increased their reliance on market borrowings to finance fiscal deficits, with the share rising to 76.3% in FY26 from 71.8% in FY25, according to the Reserve Bank of India's annual report. States raised ₹12.76 trillion through SGS issuances in 2025-26 against ₹10.73 trillion in the previous year, with gross market borrowings reaching 95.1% of the amount indicated in quarterly calendars. There were 1,055 issuances during the year, including 217 re-issuances, while the amount raised as a share of total sanctions increased to 93.6% from 91.4% year-on-year.
States are experiencing significant fiscal pressure as revenue growth slows while welfare spending remains elevated, according to a Morgan Stanley report. State fiscal deficits are projected to remain at 3.2% of GSDP through FY27, which is above the Centre's prescribed limit of 3%. As reported by The Economic Times, states, which account for more than half of public spending, are facing these challenges as borrowings continue to rise despite some moderation from pandemic-era highs.
The increased reliance on market borrowings has come at a higher cost, with the weighted average cut-off yield on SGS issuances rising to 7.32% in 2025-26 from 7.20% in the previous year. The weighted average spread over comparable central government securities widened to 50 basis points from 30 basis points, while the average interstate spread on fresh 10-year SGS issuances rose to 8 basis points from 4 basis points year-on-year. According to RBI data, 27 states and two Union Territories issued dated securities with maturities ranging from two to 38 years during the year.
About 14 states continued to run fiscal deficits above 3% as of FY26, highlighting the widespread nature of fiscal challenges across the country. According to Morgan Stanley's analysis, the aggregate state fiscal deficit is expected to remain range-bound at 3.2% of GSDP in FY27, unchanged from the past two years. The report attributes this stability to cyclical pressures that continue to weigh on revenues across various states.
The RBI announced plans to introduce a Benchmark Issuance Strategy for market borrowings on a pilot basis from 2026-27 for eight states including Andhra Pradesh, Bihar, Chhattisgarh, Kerala, Madhya Pradesh, Maharashtra, Rajasthan, Telangana, and Uttar Pradesh. This strategy involves issuance in specific benchmark tenor buckets according to a pre-announced calendar to improve transparency and provide greater clarity to investors. The central bank emphasized that borrowing programmes for 2026-27 would be managed in an orderly manner, keeping in view fiscal deficit goals and evolving market conditions.
