States' fundraising may get expensive amid record borrowing, say investors

Indian states will have to pay an additional premium over central government securities to meet their record high borrowing target for the three months through March, which could further pressure banking liquidity conditions, investors said on Thursday.

BY THE NUMBERS

States aim to raise Rs 4.73 trillion ($55.22 billion) in January-March, highest-ever for any quarter, and nearly three-fourth the amount raised so far in this financial year.

This, along with the central government's Rs 2.79 trillion debt sale, will take the overall supply to Rs 7.52 trillion.

WHY IT'S IMPORTANT

State governments are responsible for a considerable share of total government spending, which has led to an increase in borrowing over the last few years.

Long-term investors such as insurance companies, provident funds and pension funds are major investors for state debt, with bulk supply in papers with maturities of 10-year and beyond.

These investors are also large buyers of ultra-long central government bonds, and heavy sale of debt from states could push yields on the central 30-50 year bonds higher.

Heavy state borrowing would also increase the country's debt-to-GDP (gross domestic product) ratio, though the centre is adhering to fiscal prudence with lower fiscal deficit and borrowing targets.

MARKET REACTION

The spread between government's 10-year and 40-year bond yields rose to 28 basis points from 25 bps a week ago, as long-term investors turned cautious for investment in the ultra-long duration.

KEY QUOTES

"The more-than-expected supply will see the spread between the 10-year government and state bond yields to rise to 40 bps from less than 35 bps," said VRC Reddy, treasury head at Karur Vysya Bank.

"It needs to be seen if states follow the issuance calendar, and in such a case some more widening of spreads cannot be ruled out."