Debt investors in India are urging the government to increase its issuance of short-duration bonds, as lenders flush with surplus rupee liquidity search for viable investment options, according to a report.

The call reflects a pronounced increase in the banking system's liquidity surplus, a shift that has widened the gap between the cash banks hold and the instruments available to deploy it in. Short-duration government securities are typically favored in such conditions because they allow banks to park funds at relatively low risk while retaining flexibility over maturities. In response, the government is currently reviewing its borrowing schedule for the second half of the fiscal year, which is due to be revealed later this month.

Market analysis indicates strong demand for a boost in the supply of short-duration bonds, with banks benefiting from the excess cash actively seeking instruments in which to deploy it. India's government sets its market borrowing calendar in two tranches each fiscal year, making the upcoming second-half announcement the natural venue for any adjustment in the mix of maturities offered to investors.

How the government responds to this demand is worth watching in the coming announcement, as the composition of new issuance will shape where surplus banking liquidity is absorbed in the months ahead.

Source: Economic Times Markets