States' Borrowing Costs Continue To Fall, Down 6 Basis Points To 7.46%

The borrowing cost for the states fell for the fourth consecutive week as the weighted average cut-off eased 6 basis points to 7.46% at the weekly auctions on Tuesday.

Ten states have raised Rs 10,500 crore at the latest auction of state development loans, which is 1.5% higher than indicated in the borrowing calendar, a first in a couple of years. Since the outbreak of Covid, states were borrowing much lower than indicated amount thanks to higher grants from the central government.

Last week the Centre released Rs 58,300 crore as tax devolution for July, up from Rs 47,600 crore each in the first quarter. Additionally, the Centre had approved Rs 31,500 crore of special assistance for capital expenditure to 10 states during that month.

The weighted average cut-off has eased by 6 bps to 7.46% from the past week, despite the weighted average tenor increasing to 14 years from 13, and the spread between 10-year state debt and the 10-year G-Secs yield declined to 37 bps from 39 bps last week, according to an analysis by Icra Ratings.

Reflecting the declining trend, the 10-year G-secs yield declined to 7.08% from 7.14% last Tuesday.

Also, the weighted average cut-off of the 10-year state bonds eased to 7.45% today from 7.53% last week. Accordingly, the spread between the weighted average 10-year state debt and new 10-year G-Secs yield dipped to 37 bps from 39 bps.

Himachal Pradesh, Madhya Pradesh, Rajasthan and Sikkim, which had not indicated their participation in the auction, issued Rs 5,800 crore, while Goa borrowed Rs 800 crore more than indicated. In contrast, Haryana, Kerala, Meghalaya, Tamil Nadu, and Bengal did not participate in the auctions, even though they had indicated a combined borrowing of Rs 5,200 crore.