Despite near record low interest rates, the pricing of state government bonds skyrocketted to an 11-month high of 7.19 per cent, at the latest auction of Rs 23,806 crore market borrowings on Tuesday.
It can be recalled that at the first auction of state bonds on April 7, 2020, Kerala was forced to offer 8.96 per cent on its Rs 6,000 crore market borrowing. This happened a fortnight after the RBI unveiled a slew of measures to ensure liquidity. This was the highest any state paid in interest cost for a market borrowing in recent years.
Analysts blamed such high cost of debt for the fear of banks and other investors of government debt of massive fiscal slippages due to the pandemic. The borrowing cost for the states at latest auction rose to an 11-month high of mid-April levels when it touched 8.96 per cent. In fact, there has been a sustained increase in the cost of market borrowings for states since the past six weeks, even though the yields began to rise only after the budget announcement, yet only by 31 bps since then.
At Tuesday's auction, the weighted average cost of borrowing for the states across states and tenures at 7.19 per cent was 18 bps higher than a week ago when it was only 7.01 per cent on February 16. The average weekly borrowings so far this fiscal has been Rs 14,584 crore so far this fiscal.
With just one more month left for the pandemic-hit year to draw its curtains down, the states have cumulatively raised 84 per cent of their budgeted market borrowings at Rs 6.90 lakh crore YTD, which is 33 per cent more than the borrowings in the year-ago period. Seventeen states on Tuesday raised Rs 23,806 crore at the auction of the state government securities wherein Jharkhand accepted an additional Rs 400 crore and Punjab did not accept any amount in the auction.
Between April 7, 2020 and February 23, 20201, 28 states and two union territories have cumulatively raised Rs 6.90 lakh crore via market borrowings, up 33 per cent over the year-ago period when it stood at Rs 5.18 lakh crore, according to the data collated by Care Ratings. With this the states have so far raised 84 per cent of the scheduled market borrowings for the fiscal.
The reluctance of the RBI to accept higher yields for the g-secs at the recent weekly auctions and the subsequent devolution of the unauctioned securities on primary dealers has weakened sentiments further, the Care report said, adding this was despite the massive surplus liquidity with banks at over Rs 5.5 lakh crore and the higher OMOs by RBI. The demand for government securities has been low due to the higher supply of these securities consequent to the higher borrowing by the Centre and states.
The central government has announced an additional borrowing of Rs 80,000 crore for the current fiscal, taking its total borrowing for the year to Rs 13.9 lakh crore. The centre has also allowed 21 states additional borrowing of Rs 91,667 crore under the special dispensation announced in the special economic package in May 2020. The year-on-year state-wise increase in market borrowings has been highlighted in table 2 below.
While some states like Odisha (lower by 45 per cent), Tripura (27 per cent lower) and Arunachal (14 per cent lower) have been borrowing less than last year, Madhya Pradesh (133 per cent jump), Rajasthan (58 per cent), Maharashtra (52 per cent), Telangana (46 per cent), Karnataka (43 per cent), Andhra (36 per cent) and Tamil Nadu (35 per cent) have seen borrowing much higher. In fact six states–Tamil Nadu, Maharashtra, Karnataka, UP, Rajasthan and Andhra– accounted for 53 per cent of the total borrowings so far in this fiscal.