Prime Minister Narendra Modi's administration is seeking help from the households of the nation to address a significant debt challenge of $346 billion. Over the next five years, a record amount of 29.7 trillion rupees worth of sovereign bonds are set to mature due to the borrowing during the pandemic and infrastructure spending by Modi's government. In order to manage this debt burden, the Reserve Bank of India and the government are engaging in swapping maturing debt with longer-dated bonds.

Households have emerged as a key player in these debt refinancing auctions by investing through insurers who are purchasing substantial amounts of long-term sovereign bonds. The demand from households and insurers is substantial, with the possibility even being raised to issue 100-year bonds by the head of Life Insurance Corp. of India. The market for government securities in India is being transformed due to this shift in investor behavior.

The finance ministry has set a target of swapping 2.5 trillion rupees worth of debt for the upcoming fiscal year, a goal that seems achievable given the annual expansion of the insurance sector. The strategy of swapping debt has shown positive results, with the average yield on new issuances easing and their maturity extending in the last quarter of the previous year.

Insurers are keen on acquiring long-term assets to match their liabilities, driving their participation in these swap operations. The demand for sovereign bonds is expected to remain high as quality long-term debt papers are scarce in the market. Consequently, the government has been increasing its borrowing through long-tenor bonds and is expected to announce its borrowing plan for the upcoming period.

The growing demand from the households for sovereign bonds is seen as a positive development compared to the past when bond vigilantes had the potential to quickly increase borrowing costs. However, despite the benefits, the government may face challenges from the steep rise in provincial debt sales, particularly due to increased welfare program spending by the states offering higher yields.