Borrowing cost set to be lower for states in H2: Care Ratings

With states raising Rs 1.33 lakh crore at average interest rate of 7.72 per cent in the first half, the cost of borrowing is expected to come down in the second half ending March, a report has said.
"With interest rates poised to decline, the states will be able to lower their overall cost of borrowing during the year and hence would be able to improve their fiscal balances on this score," Care Ratings said in a report.
Some states such as Karnataka, Bihar, Jharkhand and Chattisgarh have not yet accessed the market and will hence to gain even more significantly with borrowings to come at a lower cost, it said.

During the first half, 23 states raised Rs 1.33 lakh crore.
On an average basis, the state government loans have been reckoned at 7.72 per cent for a sum of Rs 1.33 lakh crore that has been raised on a consolidated basis, it said.
This may be contrasted with the central government borrowing where the average cost was 7.42 per cent on gross loans of Rs 3.26 lakh crore.

The differential between the central and state government cost is hence around 30 bps which is a premium that the central government commands, even though both these securities qualify for SLR, it said.

State governments borrow from the market to meet their fiscal requirements within the contours laid down by the FRBM Act. While the rule is to stick to the 3 per cent of GDP mark, exceptions have been made at times for special states.
Also with the UDAY Scheme being accepted by some states, allowances have been made for some of them to exceed the 3 per cent mark.