MUMBAI: Demand for Indian federal and state bonds is expected to exceed supply for the next few years, driving down the cost of funds for the current, and next financial year, a top analyst at brokerage Axis Capital says.

Though combined borrowings of central and state governments could fall to 18 trillion rupees (US$215.49bil) in the financial year ending March 2025, demand will be comfortably above that level even if foreign investors do not buy more Indian debt, Neelkanth Mishra, head of research at Axis Capital said in a note on Monday.

“The demand-supply gap affects term premia, which can fall further,” said Mishra.

At present, the spread between the 10-year benchmark bond yield and similar tenor state debt yield is around 31 to 35 basis points (bps).

Favourable demand-supply balance has also pushed the spread, or additional amount sought by investors, for state government bonds to a record low.

The spread for maturity papers of 20 years and above has further shrunk to around 20 to 25 bps.

If the US Federal Reserve starts policy easing, it would also boost demand from foreign investors for government bonds, Mishra added.

 - Reuters