The weighted average cost of state development loans rose to 7.69 percent this week, the highest level so far in the current financial year.
Experts said this was because of the rise in the yield on government securities, uncertainty among investors due to global concerns and higher-than-indicated borrowings by states.
“Borrowings by states in Q1 and Q2 remained below the indicative calendar. However, states borrowed 14 percent higher than indicated so far in Q3,” said Ajay Manglunia, Managing Director and head of the investment group at JM Financial. “This has led to the spread widening owing to higher supply. Also, the recent spike in G-Sec yields has dented market sentiment.”
Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, said the increase in yield is purely attributed to rising G-Sec yields and uncertainty in the global markets.
State development loans are bonds issued by state governments to fund their fiscal deficit. Each state can borrow up to a set limit.
On October 23, nine state governments and one Union Territory raised Rs 18,900 crore through state government securities. The amount was about 72 percent higher than the indicative amount in the third quarter of the current financial year.
In the indicative calendar, states planned to raise Rs 11,000 crore on October 23, the Reserve Bank of India said in a statement.
Over the past few days, especially after the monetary policy on October 6, the yield on government securities has risen by 15-17 basis points (bps). Currently, the yield on 10-year benchmark government securities is at 7.3645 percent.
One basis point is one-hundredth of a percentage point.
During the monetary policy review meeting, RBI governor Shaktikanta Das said the central bank may have to consider open market operations (OMO) to manage liquidity, which is consistent with the stance of the central bank.
OMO refers to the purchase or sale of government securities in the open market by the central bank. Such open market sales lead to a fall in bond prices, thereby pushing up yields. Bond prices and yields move in opposite directions.
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Borrowings
Borrowing by states in the first quarter of the current financial year was just over 83 percent of the indicative amount, according to data compiled from the RBI website. In the second quarter, they were 80 percent of the indicative borrowing.
However, so far in the October-December quarter, the amount raised by state governments has been higher than the indicative amount. They raised Rs 67,384 crore through SDLs against indicative borrowings of Rs 59,242 crore, according to the data.
Manglunia added that the GST cess that the Central government shared with the states has ended and the states need to fund this gap through borrowings.
“Also, elections are forthcoming and states are increasing their capex,” he added.
Tulsyan said the states have been able to manage their entire borrowing plan very well and it is at a much lower level than last year’s loans.
Outlook
Experts said that the borrowing cost of states is likely to stay high.
“Borrowing costs will remain elevated as the economic environment indicates tightness in liquidity along with a gap in demand-supply,” Manglunia said.
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