States' borrowing cost up at record 7.69% despite 40% dip in bond issuances

In spite of a sharp 40 per cent decline in bond issuances, states have been forced to pay more for their market borrowings as the weighted average interest rate touched a record 7.69 per cent at the latest auctions of state government securities.

So far this fiscal, the issuance of State Development Loan (SDL) as state debt is known, has declined 40 per cent as 10 states did not participate in the auctions conducted so far.

However, at the auctions held on Tuesday, the issuances were 7 per cent higher-than-indicated. After four consecutive weeks of trailing the indicative level, it is the largest weekly auction so far in FY23, according to a note from Icra Ratings.

As per the note, at the auctions held on Tuesday, the weighted average cut-off hardened by a whopping 34 basis points (bps) to 7.69 per cent from last week, with rising cut-offs across tenors leaving the spread between the 10-year SDL and G-Sec at 46 bps.

Andhra Pradesh paid a whopping 7.76 per cent for its 10-year money, reflecting the hardening cut-offs across tenors, in spite of a decline in the weighted average tenor to 11 years from 13 years during the same period. This was the first 10-year instrument issued by any state this fiscal.

The benchmark 10-year G-Sec yield rose 18 basis points to 7.30 from 7.12 per cent last Monday), following the RBI hiking the repo rate by 40 bps to 4.40 percent on May 4.

Four states borrowed Rs 10,000 crore on Tuesday, which is Rs 700 crore more than the total amount that had been indicated, and was 7 per cent higher than the Rs 9,300 crore initially indicated in the auction calendar.

The issuance was higher as Haryana (Rs 1,500 crore) and Punjab (Rs 500 crore) participated in the auctions even though they did not indicate their participation for this week earlier.

Two states borrowed more than indicated with Maharashtra selling Rs 3,000 crore more than indicated and Andhra Pradesh selling Rs 2,000 crore more than the amount notified in the auction calendar.

In contrast, eight states did not participate in the auction at all, even though they had initially indicated they would borrow Rs 6,300 crore.

However, today's issuance was 17.7 per cent lower than Rs 12,200 crore states borrowed last year.

Cumulatively, four states have raised Rs 22,400 crore so far this fiscal, which is nearly 40 per cent lower than Rs 37,200 crore issued by 13 states/UTs in the same period last year.