States' borrowing becomes cheaper by 12 bps in one month amid positive domestic cues

Bonds

Borrowing by states became cheaper by 12 basis points (bps) in the last one month, according to Reserve Bank of India (RBI) data. This is because of the lower borrowing by states than indicated in calendar through State Development Loans (SDL), easing the yield on the government securities and demand from the state-owned banks, money market experts said.

The yield on 10-year SDLs stood at 7.32 percent in the primary market on July 9, compared to 7.44 percent on June 4. Similarly, other tenure papers also saw some yield moderation of 5-7 bps.

SDLs are issued by state governments and the auctions facilitated by the RBI. Usually, the Employees' Provident Fund Organisation and other pension funds, banks, some mutual funds, and other long-term investors invest in these securities.

“Consistent lower SDL supply and reducing benchmark yield are contributing to lower cost of borrowing for states,” said Mataprasad Pandey, vice president, Arete Capital Service.

Further, according to the Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house, demand from the market however is healthy which has led to overall ease in the borrowing costs for the states.

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In the last one month, states have borrowed less than the indicated amount from the market, due to heavy borrowing in the last quarter, and issuers waiting for clarity on the numbers in the upcoming Union budget, experts said.

They added that most issuers may tap the market once there is more clarity on the central government market borrowing numbers, which could help issuers get better interest.

The lower borrowing numbers, which is expected due to the heavy dividend transfer by the RBI and other state-owned companies, will give the market a breather, which could result in a fall in yields. Also, lower supply of papers from the central government will shift investor demand towards corporate bonds and state government securities.

As per RBI’s data, between June 11 and July 9, states borrowed Rs 52,513.88 crore through SDLs, which was just 70 percent of the total indicated amount of Rs 74,950 crore  in the calendar.

On July 9, four states and one Union territory (UT) raised Rs 6,100 crore through the state government securities, which was nearly 40 percent below the amount indicated for the week in the Q2FY25 auction calendar.

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The SDL's weighted average cut-off declined to 7.33 percent on July 9, from 7.37 percent a week earlier, despite the jump in weighted average tenor to 21 years from 15 years during the same period, according to an ICRA report.

Further, the spread between the cut-off of the 10-year SDL and the 10-year G-Sec yield eased to 33 bps on July 9,compared to 35 bps in the prior week, and 40 bps on June 4.