Borrowing costs rise sharply for states on Ukraine-led geopolitical strife

Cut- off for state Development Loans up by 19 bps this week over auction held last week

Reflecting the pressure from geopolitical tensions, the market borrowing for state governments turned costly as the cut- off for state development loans (SDL) shot up by 19 basis points this week over the auction held last week.

The weighted average cut-off of the aggregate SDL issuance hardened by 19 bps to a FY2022-high of 7.29 per cent today from 7.10 per cent in the last auction. The weighted average tenor of SDLs increased to 16 years from 13 years, rating agency Icra said.

Madan Sabnavis, chief economist, Bank of Baroda said SDL yields show today that not only have the cut-offs risen but also the spread over G-sec has increased.  This also pushes up the cost of borrowings of states which still have a way to go in terms of completing their borrowing plans, unlike the Centre which isn't going for further market borrowings.

Led by the sharp surge in crude oil prices reflecting the geo-political tensions, the yield on the 10-year government of India bond (G-Sec; 6.54% GS 2032) closed at 6.89 per cent today, 12 bps higher than 6.77 per cent last Monday.

Seven state governments and one Union Territory (UT) raised Rs 16,900 crore through SDLs, ~39% lower than the Rs. 279 billion that was initially indicated for this week in the auction calendar for Q4 FY2022.

Overall, in nine out of the 10 weekly SDL auctions held so far in Q4 FY2022, the actual amount raised was lower than the indicated (aggregating to Rs. 1.7 trillion vs. the Rs. 2.5 trillion indicated for Jan-March 8, 2022). The issuance is expected to be Rs. 0.8-1.0 trillion lower than indicated for Q4 FY2022, ICRA added.