At a time when demand for Indian debt seems to be falling, among both foreign and local investors, 19 state governments raised as much as R26,390 crore through auction of bonds on Tuesday. The yields on the five largest bond issues were lower by as much as 76-79 basis points on a year-on-year basis, data on the Reserve Bank of India website revealed.
In comparison, the 10-year benchmark yield on Tuesday closed at 6.80%, over 90 bps lower than at the same time last year. Typically, state development loans are priced 40-60 bps higher than the prevalent 10-year benchmark.
The RBI has lowered its repo rate by as much as 175 points since January 2015 and this has resulted in lending rates and yields on debt instruments falling significantly over the period.
The largest bond issue by an Indian state this month was Maharashtra’s R5,000 crore issue. The cut-off yield on the issue came in at 7.39%, 76 bps lower than the cut-off yield on Maharashtra’s R2,000 crore issue in November last year.
Issues by other states also saw drop in yields; the cut-off for the issues by Tamil Nadu, Uttar Pradesh, West Bengal and Karnataka were all 76-79 bps lower than in the corresponding month a year ago.
The Tuesday auction took place at a time when investors are actively exiting the domestic debt market, either looking to book profit or looking for better prospects. However, these issues still got oversubscribed, with all the states accepting bids for amounts equal to or larger than the notified amounts.
“The market looks to be very light right now. If you see, there has been a lot of selling over the last month and a half and right now, most investors have enough room in their portfolios to buy more,” said R Sivakumar, head of fixed income at Axis Mutual Fund, adding that most of the demand for Tueday’s auction was seemingly due to investors finding themselves with cash to invest.
Market participants also said that the difference between the 10-year benchmark yield and the yields on the auctioned state development loans (SDLs) has gone back to around 60 bps as opposed to around 15-30 bps in the September auction this year and that this could have played a part in attracting so much investment.
“These bonds are still very attractively priced. The disparity between the benchmark and the SDLs has gone back to around 50-60 bps and that it is what it is typically priced at. So definitely, investors could have preceived it as an opportunity to buy because these yields are still looking good when you compare them to other economies,” said Karthik Srinivasan, senior vice-president at credit rating agency ICRA.