Are State Loans Getting Costlier ? RBI’s New Warning

Borrowing rates for Indian states are rising fast. The Reserve Bank’s latest alert points to deeper pressure on public finances.

Have you noticed how even the states now talk about “costlier loans”? The RBI’s October 2025 Quarterly Borrowing Report says states and union territories will raise ₹2.82 lakh crore through market loans this quarter. That’s 11 percent higher than last quarter. The RBI alert on rising state loan costs shows how tight the market has become.

When yields go up, every extra rupee borrowed adds more strain to state budgets. It isn’t only numbers on paper; it means fewer funds for local works and welfare. The impact of RBI policy on state loan rates is already visible.

What Triggered RBI’s Warning to States?

In September 2025, the RBI asked states to spread borrowings across short and long terms. A Reuters report said the move followed a sharp jump of 10 to 27 basis points in State Development Loan (SDL) yields during August 2025, confirmed by Moneycontrol.

It simply means investors now ask for higher interest before lending to states. That’s the reason behind the RBI warning about expensive state borrowing.

Read More - Short-Term Borrowing Climbs
 

Even a small rise like this adds thousands of crores to interest payouts. That’s how we see it anyway.

What Are State Development Loans? Know Before You Blame RBI

A State Development Loan is a bond issued by a state government through RBI auctions. The rate depends on demand. When fewer buyers bid, interest rates climb. Right now, the India state government loan interest rates average between 7.1 and 7.3 percent.

(Source: RBI Borrowing Calendar Oct 2025)

Also Read - RBI’s 50 bps Repo Cut, Bank Lending Rates

Feels strange sometimes, even stronger states are paying higher interest now.

How Is This Linked to Past Government Moves?

Back in January 2025, the Finance Ministry’s report on 50-year interest-free loans said states got ₹3.6 lakh crore for capital projects. 

Later, a LoansJagat article said another ₹40,000 crore was allowed for capex. Those loans helped then, but the market part of borrowing has grown heavier this year.

Conclusion 

In earlier years, the RBI softened auctions to keep costs low. Not this time. The repo rate stays at 6.5 % through 2025, making state debt becoming costlier due to RBI actions unavoidable.

Public banks are buying more SDLs to earn better returns. A Business Standard October 2025 report confirmed PSU banks have raised their investment cap. It looks smart now, but higher yields can hurt later if rates fall.

By March 2024, total state debt had already touched 28.5 % of GDP as per Data.gov.in. If borrowing keeps this pace, that figure could cross 30 % soon. So, the RBI’s warning stands: borrow carefully or pay the price later.