States see drop in borrowing cost as bond yields soften after RBI policy

Borrowing cost for states eased after the Reserve Bank of India’s delivered a dovish policy last week which softened the bond yields.

In the auctions on Tuesday, states borrowed Rs 12,100 crore from the market compared with Rs 14,200 crore last week, with most of them opting for longer-term borrowing.

“Easing pressure on yields was seen. Cut-off yield for Andhra Pradesh was down to 7.13 per cent compared with 7.18 per cent in the auction held on January 4, 2022. Karnataka's yields were down to 7.16 per cent (14-year) and 7.12 per cent (15-year), from 7.35 per cent and 7.33 per cent respectively, last auctioned on 18 Jan 2022,” said Madan Sabnavis, chief economist, Bank of Baroda.

Yield on Punjab's 15Y paper also fell to 7.12 per cent from 7.31 per cent before (January 11, 2022). Tamil Nadu auctioned 25-year paper at 7.13 per cent compared with 7.22 per cent earlier in January 22.

The spread between the 10-year state development loans and G-sec narrowed to 40 bps today from 48 bps last week.

The yield on the 10-year benchmark bond fell sharply after RBI kept both the repo and reverse repo unchanged in the February review of monetary policy. The market was expecting a hike in the reverse repo rate – 65 bps lower than the repo rate as compared to 25 bps of pre-pandemic times. The yield of the 10-year government paper is down to 6.69 per cent, which went up 6.92 per cent after the Union budget announced a net borrowing of Rs 11.6 trillion for FY23.