The Curious Case Of The Sudden Spike In State Borrowings This March

"Higher fiscal deficits in Indian state government budgets, along with tapering grants-in-aid from the centre, have prompted them to borrow a larger amount through bonds than was indicated earlier in March 2024.Last week, 17 state governments sold bonds worth Rs 50,206 crore, a record number for a week, according to the Reserve Bank of India data. This was 80% more than Rs 27,810 crore designated for state issuances in their indicative calendar of borrowings in late December.Another surprise for bond traders came when Uttar Pradesh and Maharashtra offered to sell their stock worth Rs 24,000 crore through auction the same day. This is a rare occurrence in the government securities market, as states usually sell bonds only once a week on Tuesdays.Combining the weekly auctions for March, the actual borrowing by states stands at Rs 1.97 lakh crore if the entire bids worth Rs 60,000 crore for the auction to be held on March 26 are accepted. This is what market traders expect anyway. The indicative calendar suggests total borrowing for March at Rs 1.27 lakh crore.On March 26, 18 state governments will offer to sell bonds for an aggregate amount of Rs 60,000 crore, marking the final such auction for FY24. This is 51% higher than indicated in the calendar for the quarter.While borrowings have exceeded targets for three consecutive weeks, cumulative borrowing for the quarter is still within expectations.For the January–March quarter, the RBI had earmarked total market borrowings by the state governments at Rs 4.13 lakh crore. Assuming that the entire Rs 60,000 crore will go through, the actual borrowing could be Rs 4.08 lakh crore for the quarter..The timing is crucial, as Lok Sabha elections are due to be held from April 19 to June 1.States, with support from the centre, have a continued focus on capital spending to provide the much-needed fillip to investment activity in the economy, according to Paras Jasrai, senior analyst of public finance at India Ratings.'Part of the reason is the lower proportion coming from grants and the consistent focus towards capex (by state governments), which means that borrowing would be higher,' Jasrai said.As central government grants are reaching the end of the term recommended under the 15th Finance Commission, state governments are looking for alternate arrangements.The union government is providing grants to states between FY22 and FY26 in such a manner that they taper off in successive years. As grants reduce, states are likely to augment their revenue or reduce expenditures to maintain revenue balance, experts said.India Ratings highlighted that the budgeted revenue growth in FY25 would be the lowest, at 9.2% since the pandemic, due to a contraction in grants from the centre. Grants from the union government have been budgeted at Rs 6.3 lakh crore, 7.4% lower than the revised estimates for FY24.The union government's budget calls for a 10.4% increase in tax devolution in FY25.As a result, the grants, along with tax devolution from the union government to states, are projected at a multi-year low of 5.5% of GDP in FY25, according to analysis by India Ratings.'Capex, at state government levels, has picked up this year... The grants part, which is basically compensation that states have had in earlier years and till the previous year, they don't have access to them now,' Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, said.For the March quarter, the RBI earmarked total market borrowings by the state governments at Rs 4.13 lakh crore, out of which 75% was utilised until March 21, according to Mataprasad Pandey, vice president at ARETE Capital Service. This means state governments have an unutilised limit for borrowings towards the end of the financial year, thus giving legroom for increased bond auctions.It is reflected in the auction announcement by the RBI on Thursday of 18 state governments offering to sell bonds for an aggregate amount of Rs 60,000 crore on March 26—the last such auction scheduled for FY24.This is 51% higher than indicated in the calendar for the quarter.For FY24, states have projected their fiscal deficits at 3.1%. This is lower than the limit of 3.5% for the year, implying that states are not utilising the entire fiscal space available to them. Considering revenue growth so far has been a bit lower than what was budgeted, India Ratings pegged the aggregate fiscal deficit of the states for FY25 at 3% of GDP, 40 bps down from the revised estimate in FY24.'Fiscal deficits are tracking much above last year's levels. In January last year, the 12-month rolling deficit was 1%, but by the end of March it was at 2.8%. If you see this January's 12-month rolling deficit, it is 2.8–2.9%; ultimately, it will end above 3%,' Upadhyay said.Upadhyay estimates the fiscal deficit at 3.1-3.2% for FY24.Another lucrative factor for state governments to borrow funds from is the low spread between 10-year benchmark bonds and 10-year state bonds. For instance, the cut-off yield on bonds auctioned by Uttar Pradesh and Maharashtra on Thursday ranged from 7.42 to 7.48%. Comparing this to a 10-year benchmark bond at 7.1%, the spread is 30–40 basis points.In the absence of a large supply of bonds, state bonds saw strong demand from investors. '...it is less than 40 bps spread, which is not high,' Upadhyay said. 'The G-sec curve itself is quite flat, and you are getting a low spread for these kinds of borrowings. It must have been considered attractive.'Mayank Prakash, deputy head of fixed income at Baroda BNP Paribas, holds a different view.One likely reason for state governments to tap government bonds for funds could be approval by the centre on an extra borrowing ceiling of over Rs 60,876.8 crore to 22 states in FY24 for the National Pension Scheme contribution.'The latest numbers for Maharashtra, Tamil Nadu and Uttar Pradesh show that these three states are the ones whose NPS contribution is not yet done. So, probably the issuances have come for that.' Prakash said."

The Curious Case Of The Sudden Spike In State Borrowings This March

State governments offered to sell bonds worth Rs 60,000 crore in last week of the current fiscal, 51% higher than indicated earlier.

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The Curious Case Of The Sudden Spike In State Borrowings This March

State governments offered to sell bonds worth Rs 60,000 crore in last week of the current fiscal, 51% higher than indicated earlier.

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