Debt Recast In Motion: RBI Executes Strategic Bond Switch And Buyback To Ease Redemption Pressure

In a coordinated effort to optimize India’s debt maturity profile and reduce near-term repayment pressure, the Reserve Bank of India has executed a series of bond switch operations and buybacks on behalf of the central government. The latest auction, held in mid-September 2025, involved the replacement of short-term securities with longer-dated instruments and the simultaneous issuance and repurchase of government bonds.

 

These actions are part of the government’s Rs 2.5 lakh crore debt management program for FY2025–26, aimed at smoothing redemption spikes, lowering refinancing risks, and improving fiscal sustainability. The RBI’s strategy reflects a proactive approach to managing sovereign liabilities amid stable interest rate conditions and strong demand for long-duration paper.

 

Key highlights from the RBI’s latest debt operations

 

- Government issued Rs 63.74 billion in new bonds during the switch auction  

- RBI bought back Rs 66 billion worth of short-term bonds maturing in FY2027–FY2029  

- 7.26 percent 2029 bond switched to 7.40 percent 2035 bond at a cut-off yield of 6.5214 percent  

- 7.37 percent 2028 bond switched to 7.62 percent 2039 bond at a cut-off yield of 6.8052 percent  

- 7.06 percent 2028 bond switched to 7.62 percent 2039 bond at a cut-off yield of 6.8127 percent  

- Total switch volume for this tranche estimated at Rs 32,000 crore  

- Cumulative buybacks since April 2025 now exceed Rs 69,000 crore  

 

Purpose And Mechanics Of Bond Switching

Bond switching allows the government to replace near-term liabilities with longer-term instruments, thereby reducing redemption spikes and improving fiscal planning. In this round, the RBI targeted three bonds maturing in 2028 and 2029, replacing them with securities maturing in 2035 and 2039. The cut-off yields for the new bonds were lower than their coupon rates, indicating favorable market conditions and strong demand.

 

The simultaneous buyback of Rs 66 billion in short-term bonds further supports liquidity management and helps banks rebalance their portfolios toward longer-duration assets.

 

Operational Impact And Fiscal Implications

The switch and buyback operations are expected to:

 

- Reduce redemption pressure in FY2027–FY2029  

- Improve the government’s debt maturity profile  

- Lower refinancing risk and enhance investor confidence  

- Potentially reduce interest outgo over the medium term  

- Align with global rating agency expectations for sovereign upgrades  

 

These actions also support the RBI’s broader monetary policy goals by stabilizing yields and maintaining orderly market conditions.

 

Market Response And Yield Dynamics

Bond markets responded positively to the switch auction, with benchmark 10-year yields remaining stable around 6.44 percent. The cut-off yields for the new long-term bonds—ranging from 6.52 percent to 6.81 percent—were within market expectations, reflecting investor comfort with India’s debt trajectory.

 

Debt mutual funds and institutional investors have shown renewed interest in long-duration government securities, driven by expectations of rate stability and improved fiscal discipline.

 

Strategic Backdrop And Future Outlook

The RBI’s debt management toolkit includes bond switches, buybacks, auctions, and issuance of floating-rate and inflation-linked bonds. With Rs 1.18 lakh crore of the budgeted Rs 2.5 lakh crore switch target already achieved, further operations are expected through FY2025–26.

 

Future tranches may target bonds maturing in FY2030–FY2032, depending on market conditions and fiscal requirements. These efforts are central to India’s strategy of maintaining macroeconomic stability while funding infrastructure and welfare programs.

 

Sources: Reserve Bank of India, The Economic Times, Business Standard