The yield on India’s 10-year G-Sec rose above 6.6%, hitting a two-week high, as markets priced in record state borrowing amid tepid demand and tight liquidity. Indian states plan to raise 5 trillion rupees in the January-March quarter, their largest-ever quarterly borrowing, with 301 billion rupees set for auction Tuesday. Traders have been offloading bonds over the past few weeks, uncertain whether the market can absorb the surge in supply. Liquidity has also tightened, with the banking system’s daily surplus averaging 614 billion rupees as of January 2, down from 1.78 trillion in November. Foreign investors remain cautious after selling a net 123 billion rupees of index-linked bonds in December, while the rupee’s weakness adds to outflow concerns. To support the market, the RBI will inject 500 billion rupees via bond purchases, though lenders are expected to offer bonds at higher-than-prevailing yields. With supply at record highs and demand easing, the 10-year yield could test 6.7%.

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