A divergence of 100 basis points between the repo rate and the G-sec yield can translate into an additional interest burden of nearly ₹28,000 crore on government borrowings | Photo Credit: Umesh Negi

Given the circumstances under which the June meeting of the Monetary Policy Committee (MPC) is taking place, there is little expectation that the Committee would seek to compound the problems of domestic economic agents by raising the cost of money.

Consequently, a status quo on the repo rate is the broad market consensus. This time around, however, the Statement on Developmental and Regulatory Policies — issued alongside the MPC decision — may prove more consequential.

Transmission of policy rates will continue to remain a key issue. The RBI’s assessment of how effectively reductions in the repo rate have been transmitted to deposit and lending rates will be watched. Yet there is another dimension of transmission that receives less attention.

The largest borrower in the country is not a corporate house, nor the household sector. It is the Government of India. State governments, taken together, constitute another large borrowing segment.

Against incremental credit absorption (growth) of about ₹30 lakh crore in FY 2025-26, the combined net market borrowings of the Centre and the States in the same period were around ₹26 lakh crore.

In other words, governments borrow almost as much as the entire non-government sector. More importantly, the Government of India is by far the single largest borrower in the market, dwarfing every corporate borrower. In FY 2025-26, the Centre borrowed approximately ₹11.5 lakh crore and the largest corporate loan would probably not have exceeded ₹25,000 crore.

Given this reality, should monetary transmission not also be assessed by its impact on sovereign borrowing costs?

Over the recent period, the repo rate has been reduced by 125 basis points. The benefit of this reduction has flowed, in varying degrees, to different segments of borrowers. Yet the benchmark yield in the government securities market is currently around 7 per cent, compared with about 6.30 per cent a year ago. Thus, even as the central bank’s policy rate has moved down, governments have found themselves paying more.

Public discussion on monetary policy generally centres on the borrowing costs of housing loans, vehicle loans, personal loans, and MSME credit. Transmission is deemed successful if banks pass on repo rate cuts to these sectors. As for large corporates, their professional treasury managers negotiate aggressively and borrow at the most competitive rates available.

The more fundamental question is this: if monetary easing does not reduce the risk-free benchmark rate in the economy, can transmission really be regarded as complete? And if not, should this issue not invite greater policy attention? The RBI is not merely the monetary authority; it is also the debt manager for both the Union and State governments.

Interest burden

The fiscal impact is material. More than one-fourth of the Union Government’s expenditure is devoted to servicing debt. In the Union Budget for FY 2026-27, interest payments alone are estimated at about ₹14 lakh crore out of a total budget size of ₹53 lakh crore. State governments collectively would have a comparable interest burden.

A divergence of 100 basis points between the movement in the repo rate and the G-sec yield can translate into an additional interest burden of nearly ₹28,000 crore on government borrowings. For many States, even a difference of ₹1,000 crore in borrowing costs can materially affect fiscal planning.

On the ground, almost every category of borrower has vocal advocates who raise concerns about the cost of credit. Governments, however, appear to have no such constituency. One cannot expect politicians or ministers to focus on the finer points of sovereign yield movements. But public finance managers would certainly know that while the overall cost of debt and capital has declined, governments have not enjoyed a similar benefit. (For government, read the people.)

There is, of course, merit in the argument that inflation expectations, fiscal deficits and global bond market movements influence sovereign yields. Markets may have entirely valid reasons for keeping long-term government bond yields elevated despite policy easing. Yet the asymmetry in transmission remains striking. When banks fail to transmit repo rate reductions, it is viewed as a policy failure. When sovereign yields fail to respond — or move in the opposite direction — it is accepted as a market outcome.

As India’s public debt and borrowing requirements continue to grow, perhaps the concept and coverage of monetary transmission deserves a relook. A textual approach would be to assess that inflation is the sole parameter for assessing monetary policy effectiveness, not even transmission. But, should the success of regulatory moves not also be judged by the behaviour of the sovereign yield curve, given its impact on public debt?

The writer is a commentator on banking and finance

Published on June 4, 2026