Borrowing through state development loans gets costlier after bond yields rise to a four-month high

bonds

The borrowing cost of state governments through the state development loans (SDL) – raised to fund their fiscal deficit – has risen sharply up to 17 basis points (bps) at the latest weekly auction, after government securities’ yield rose to over four-month high.

According to data from the Reserve Bank of India (RBI), the cut-off yield on the 10-year SDL for Goa was set at 7.17 percent, while for Tamil Nadu it was marginally lower at 7.09 percent, yet notably higher compared to the SDLs of Bihar and Meghalaya, at 7.02 percent and 7 percent respectively during an auction held on August 5.

The yield on the benchmark sovereign bonds has risen to a four-month high on August 19 on worries that higher government borrowing and lower revenue, following the proposed overhaul of the goods and services tax (GST) regime, will likely bring down the collections. Prime Minister Modi in his 79th Independence Day address promised next generation GST reforms.

On August 19, the 10-year benchmark bond yield is near 6.5217 percent, according to data from the Clearing Corporation of India (CCIL).

The Centre has proposed to essentially move towards a simpler tax with two slabs - standard and merit, with special rates applicable on only select few items, the Finance Ministry has said. This has raised concerns of lower revenue, and may prompt the Centre to borrow more from the market via government securities, said experts.