States pay 38 bps more to borrow in latest rounnd, highest in 6 weeks

The states have paid the highest price for their debt at the latest round of market borrowing on Tuesday wherein the cost of debt has gone up by 38 basis points (bps) to 6.65 per cent, according to a report.

At Tuesday's auction of state development loans (SDLs), nine states raised Rs 8,716 crore, taking overall borrowings to Rs 4.72 lakh crore or 93 per cent of the target, by 28 states and two Union Territories since April 7, Care Ratings said in a note after the auctions.

The entire notified amount was raised at the auction.

At Rs 4.72 lakh crore of market borrowings, these states have raised 49 per cent more than the borrowings in the same period last fiscal when they had raised Rs 3.16 lakh crore. According to the borrowing calendar, the states have borrowed Rs 5.07 lakh crore in the first three quarters.

With this, the states have already borrowed 93 per cent of the targeted debt, with the average weekly borrowing being Rs 14,328 crore, ranging between Rs 5,200 crore and Rs 32,560 crore.

According to Madan Sabnavis, the chief economist at the rating agency, cost of borrowing rose this week with the weighted average cost coming in at 6.65 per cent, which is 38 bps higher than last week and is the highest in the last six auctions.

The increase in yields at today's auction can in part be attributed to the expectations of additional supply of government securities following the Centre's latest stimulus package which can lead to higher market borrowings, Sabnavis said.

Although weighted average cost has declined after the RBI introduced OMOs in SDLs last month, the extent of decline has narrowed from 30 bps on October 13 to 15 bps today, he said.

But this is still very low considering that Kerala had in April paid 9.96 per cent for its first borrowing.

The RBI has so far purchased SDLs of Rs 20,000 crore via OMOs through two auctions held in late October and early November.

The spread between the 10-year state debt and G-Secs this week stood at 67 bps.

Nearly 50 per cent of the SDLs on Tuesday and 40 per cent of issuances so far carry a tenure of 10 years.

States have been resorting to higher market borrowings to meet the shortfalls in their finances consequent to the sharp fall in revenues due to the pandemic and the resultant lockdowns.

Maharashtra, Tamil Nadu, Karnataka, Andhra, and Rajasthan have been the top five borrowers, accounting for half of the total borrowings so far.

Among the borrowing states, the weighted average cost of borrowing across tenures has been the highest for West Bengal at 6.83 per cent this month and the lowest for Kerala at 4.15 per cent.