States' borrowing cost via SDL falls tracking moderation in G-sec yield

In the Union Budget 2023-24, Finance Minister Nirmala Sitharaman announced the extension of 50-year interest-free loans to the state governments by a year.

The borrowing cost of states through state development loans (SDL) eased in this week following the moderation of yields on government securities.

According to the Reserve Bank of India (RBI) data, cut-off yield on the 10-year SDL eased by 13 basis points (Bps) on-week while the 7-year SDL fell by 8-9 bps on weekly basis. One basis point is one hundredth of the percentage point.

Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincorp list out five factors for reduction in borrowing cost, which includes lower borrowing by the states compared to the scheduled borrowing calendar and market expectations of long pause of further repo hikes by monetary policy committee.

He further said the ample surplus liquidity in the banking system is playing a good role for improving sentiments of the market and less investment opportunities for investors due to starting of the financial year.

On April 24, the yield on the government securities fell sharply, with benchmark bond yield falling to near seven month low due to buying on expectation of monetary policy pivot, dealers said.

The yield on new 10-year benchmark bond 7.26 percent 2033 fell to 7.0977 percent on Monday from 7.1556 percent close on the previous trading session. Presently, it is trading at 7.0913 percent.

Whereas, the yield on old benchmark bond, which is actively traded in the market in terms of volume, eased 7.1396 percent as compared to 7.1856 percent close last week.

The yield on these bonds started easing after the RBI in the April monetary policy maintained a status quo on the rate.

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Lower fund raising in April

In the four SDL auctions so far in April, states were estimated to raise Rs 58,200 crore but ended up raising just Rs 22,300 crore, according to the RBI data. The fundraising in April has been around 39 percent of the budgeted amount.

They raised Rs 3,000 crore on April 5, Rs 5,800 crore on April 11, Rs 7,500 crore on April 18, and Rs 6,000 crore on April 25.

In March, the budgeted amount to be raised by the states was Rs 1.10 lakh crore, and they ended up raising Rs 1.4 lakh crore in four auctions.

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Interest free loan

In the Union Budget 2023-24, Finance Minister Nirmala Sitharaman announced the extension of 50-year interest-free loans to the state governments by a year.

“I have decided to continue the 50-year interest-free loans to state governments for one more year to spur investment in infrastructure and to incentivise them for complementary policy actions,” she said during the Budget speech.