The borrowing cost of states through State Development Loans (SDLs) eased to a more-than-four-year low in May, driven by rate cuts from the Reserve Bank of India (RBI) and strong demand from domestic investors.
According to the RBI data, state borrowing cost via 10-year SDL stood at 6.69-6.71 percent on May 13 during the auction, the lowest since January 25, 2021, when it was at 6.57-6.64 percent.
So far this financial year, state governments and Union territories have borrowed Rs 8,192.03 crore through state government bonds, as per RBI data.
This was around 32.3 percent of the total issuances planned in the April-June quarter of this fiscal. The indicative calendar showed that states will borrow Rs 2.74 lakh crore between April and June 2025.
Money market experts said the majority of the borrowing cost came down since the RBI started cutting rates in February this year to aid growth, and expectations of more rate cuts helped borrowing costs cool further.
The states’ borrowing cost is impacted by various factors, including prevailing market interest rates, proportion of borrowing in various tenors, quantum and timing of issuance, etc.
Additionally, the movement in yield on government securities also aids state bond yields because the former sets the benchmark for interest rates in the money market.
RBI rate cuts
In the last few months, especially after the start of rate cuts by the RBI, the yield on state government bonds fell by around 47 basis points (bps), and the yield on government securities eased by around 40 bps.
On April 9, the central bank reduced the key repo rate by 25 bps — the second consecutive cut since February this year, which has taken rate cuts to 50 bps, on a benign inflation outlook and moderate growth. It also shifted its stance from ‘neutral’ to ‘accommodative’.
Market participants expect another 50 bps repo rate cut this year. Also, inflation staying below the RBI's medium-term target of 4 percent in April is paving the way for another rate cut in the upcoming monetary policy to aid growth.
A further reduction in the repo rate is expected to help the corporates and government (both state and central) to issue bonds at lower rates.
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