States' market borrowing cost falls sharply by 11 basis points to 7.72%

After rising steeply for a month, the cost of market borrowing for states declined sharply on Tuesday with the weighted average cut-off falling by 11 basis points to 7.72 per cent from 7.83 per cent last week.

The cost declined despite a rise in the weighted average tenor to 12 years from 11 years last week, according to an analysis by Icra Ratings.

Nine states raised Rs 16,900 crore through state government securities (SGS) on Tuesday -- 10 per cent lower than the Rs 18,700 crore indicated for this week in the third quarter auction calendar. So far this year, bond sales by states are down 8 per cent over the year-ago period.

The weighted average cut-off of states eased by 11 bps (basis points) to 7.72 per cent despite a rise in weighted average tenor to 12 years from 11 years and the 10-year benchmark G-sec yield remaining stable at 7.43 per cent in the auction on this Tuesday from last Tuesday.

The weighted average cut-off of 10-year state bonds also declined by 10 bps to 7.73 per cent from 7.83 per cent, thus narrowing the spread with G-sec yield to 30 bps from 41 bps, respectively, the agency said.

States are drawing down lower from the market in spite of Reserve Bank data on the ways and means advances and the overdraft facilities for August indicating a sequential and a on-year decline in the usage.

This, the agency feels, could be on account of the comfortable cash flow position of states in August benefitting from the rise in the taxes devolved by the Centre, which doubled to Rs 1.2 lakh crore in August from Rs 0.6 lakh crore in the previous month.

Following the healthy growth in gross tax revenue, the Centre subsequently released an even higher Rs 1.3 lakh crore as tax devolution to states in September.