States borrow 45% less than budgeted amount in Q1FY25, shows RBI data

State Development Loan

State governments have borrowed 45 percent less than the budgeted amount via state development loans (SDLs) so far in the first quarter of the current financial year, according to the Reserve Bank of India’s (RBI) data.

Experts attributed the trend to the heavy borrowing by states in the previous quarters and uncertainty over results of the Lok Sabha elections.

“One of the key reasons could be the excessive borrowing by states in the fourth quarter of FY24, especially March. Q1 has been fairly flat in terms of development across the country due to the general elections. This has resulted in lower expenditure and, therefore, lower borrowings by states,” said Umesh Kumar Tulsyan, Managing Director of Sovereign Global Markets, a New Delhi-based fund house.

RBI data showed that states have borrowed Rs 1.19 lakh crore so far in this quarter as compared to Rs 2.16 lakh crore indicated in the borrowing calendar.

Further, Mataprasad Pandey, Vice President, Arete Capital Service said states seems to have slowed their borrowing awaiting Lok Sabha election results

SDLs are issued by state governments and the auctions facilitated by the RBI. Usually, EPFO, banks, pension funds, some mutual funds, and other long term investors, invest in these securities.

On June 11, states raised Rs 5,750 crore through SDLs, which was also lower than the Rs 7,750 crore amount which was to be raised in the auction.

As per the ICRA report, this could be on account of the release of enhanced tax devolution for June 2024 (to Rs. 1.4 lakh crore from Rs. 69,900 crore each in April-May 2024), which was transferred to the states on June 10, 2024.

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What does RBI data say?

As per RBI data, the amount accepted in every auction of the SDL was sharply lower than the indicative amount in the calendar.

Between April 2 and June 11, the budgeted amount was Rs 2.16 lakh crore, but the amount to be raised in the auction was just Rs 1.21 lakh crore, of which states raised only Rs 1.19 lakh crore.

The states borrowed 55.31 percent of the budgeted amount so far in this quarter.

Yield movement

Yield on the state development loans have seen a moderation in the last few months by 5-7 basis points in tandem with easing yield on government securities.

The cut-off yield on 10-year SDL which was hovering around 7.45-7.50 percent at the start of this financial year, has now reduced to 7.38-7.41 percent.

Meanwhile, the yield on 10-year benchmark government securities eased to 7.0598 percent today, as compared to 7.1160 percent in the start of the financial year.

“The spread gap between SDLs and the new 10 year benchmarks has roughly increased by 5 basis points as the benchmark has been relatively more volatile in the past few weeks,” Tulsyan said.

Also, Pandey said SDL yields have come down on account of lower SDL supply and improvement in benchmark yields.

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Way ahead
Money market experts are of the view that SDL issuances will increase in the coming months as stalled projects will start resuming as the Lok Sabha elections are over.

“We expect the borrowings by states to increase gradually now that the general elections are over and the stalled government projects will start resuming,” Tulsyan added.