States borrowing cost again on a song, hits 1-month high at 6.80%

After falling marginally for two weeks, the cost of debt-funds for the states jumped again as the weighted average cost of borrowings rose by 37 bps to a one-month high of 6.80 per cent in the auction on Tuesday compared to the last week.

At the weekly auction of state development loans, six states raised just Rs 8,000 crore, which is 41 per cent lower than the indicated Rs 13,600 crore, according to an analysis by Icra Ratings, which said this is the sixth consecutive week of lower-than-indicated issuance.

Aditi Nayar, the chief economist at the rating agency, said the spread between the 10-year state debt and the G-secs eased to a 24 month-low of 45 bps from 51 bps last week, while the weighted average cost of their borrowings jumped by 37 bps to 6.80 per cent over the past week.

Seven of the 13 states that initially indicated their participation in the auction did not raise funds, even as Telangana borrowed Rs 500 crore more than indicated, she said.

According to another agency Care Ratings, the market borrowings by the states so far in FY22 are 18 per cent less than that in corresponding period of FY21. As many as 29 states/UTs have cumulatively raised (except Odisha) Rs 4,19,900 crore so far this fiscal, down 18.4 per cent on-year from Rs 5,14,600 crore.

According to Care, the weighted average cost of borrowings, across states and tenures, rose to 6.80 per cent, which is a one-month high while the weighted average yield of the 10-year bonds was stable at 6.84 per cent at last week's level.

The issuance has trailed the notified amount for the sixth consecutive week as the cash-flow situation of the large states seem to have benefitted from the release of the final GST compensation end-October and the release of a higher monthly tax devolution to the states in November, Icra said, adding of the total funds today, Rs 3,500 crore or 44 per cent were raised in the shorter tenor of 5-9 years, Rs 3,000 crore or 38 per cent in longer tenors and a just Rs 1,500 crore or 19 per cent were in the 10-year bucket.

As a result, the weighted average tenor of SDLs dipped to 12 years today from 13 years last week and the weighted average cut-off rose to 6.80 per cent today from 6.43 per cent in the last auction, led by increase in the weighted average cut-off shorter tenor to 6.67 per cent today from 5.18 per cent last week, Nayar said, adding however, the weighted average cut-off of the 10-year SDL stood at 6.84 today, unchanged from last week.

This is despite the benchmark 10-year Gsecs yield has risen 6 bps to 6.39 per cent today from 6.33 per cent last Tuesday.

This reflects factors such as the US Fed chairman's comments regarding accelerating the bond purchase taper, while acknowledging that inflation pressures may not be transitory, the partial rebound in global crude oil prices, and the expectation that while the MPC will maintain status quo in the policy review tomorrow, it will signal upcoming policy normalisation.

Accordingly, the spread between the 10-year weighted average SDL and G-secs yield narrowed to 45 bps, the lowest since December 2019.