States borrowing cost remains high at 7.86% despite fall in G-secs yield to 7.39%

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The borrowing cost for the states continues to remain elevated, sniffing at the 7.9-per cent mark for the fourth consecutive week despite the average cut-off slipping marginally by 2 bps to 7.86 per cent at the latest auction of debt on Tuesday. Nine states raised Rs 13,500 crore through state development loans (SDLs) at the first auction of the second quarter, which is nearly 4 per cent higher than the indicated amount for this week as Gujarat accepted an additional Rs 500 crore while the remaining eight states borrowed in line with the amount indicated in the auction calendar, according to an Icra analysis.

Still the overall issuance is still 9.4 per cent lower than the year-ago period. Cumulatively, 19 states raised Rs 1,23,700 crore so far this fiscal, which is nearly 22 per cent lower than the year-ago level when it was Rs 1,59,500 crore. The weighted average cut-off declined by 2 bps to 7.86 per cent from the last auction, amidst stable weighted average tenor at 15 years. The yields had peaked at 7.91 per cent in the auction held on June 22, Icra chief economist Aditi Nayar said in a note.

The rates remain elevated as the cost for Punjab jumped to 8.04 per cent and for Telangana and Andhra at 7.90 per cent. The spread between the G-secs and SDLs widened to 42 bps as the benchmark rates for the Centre declined to 7.39 per cent on Tuesday from 7.47 per cent last Tuesday, reflecting the expectation of a lower slippage in the FY2023 fiscal deficit after it recently levied cesses on domestic sales of crude and export of fuels and increased the import duty on gold.

The weighted average cut-off for the 10-year SDL eased mildly to 7.82 per cent from 7.85 per cent last week. Accordingly, the spread between the weighted average 10-year SDL and 10-year G-sec yield increased to 43 bps from 38 bps. Another feature of the auction is that as much 56 per cent of the issuances were in the longer tenors SDLs, 23 per cent were in the medium-terms and only 21 per cent were in the 10-year maturity bucket.