State development loans’ borrowing cost rises to 11-month high as issuances, yields surge

The yield on benchmark securities touched a 20-month high on Tuesday and it has been rising for the last few days due to devolvement of three out of four bonds on primary dealers by the RBI in a weekly bond auction last week.

Demand from investors was also low, pulling up the borrowing cost on SDL.
Demand from investors was also low, pulling up the borrowing cost on SDL.

By Manish M Suvarna

The borrowing cost of state development loans (SDLs) rose to the highest level in 11 months due to a rise in issuances and an uptick in yields on government securities in the past few days. Demand from investors was also low, pulling up the borrowing cost on SDL.

The total borrowing by the states on December 28 was Rs 1,000 crore lower than the amount announced for the auction last week, but it was Rs 705 crore more than the indicative calendar of October-December. In this week’s auction, 16 states raised Rs 24,234 crore, compared with Rs 25,234 crore announced last week. The amount was lower because Punjab has not accepted any amount in the 12-year tenor.

“Sudden increase in SDL issuances, coupled with a rise in government bond yields, pushed the borrowing cost for states higher,” said Pankaj Pathak, fund manager, fixed income, at Quantum Asset Management.

Market participants said the borrowing of states was lower in H1FY22 because the Centre had front-loaded the tax devolution to states. So, the borrowing cost was lower during that period. However, now yields on SDLs have pressure of lower transfer of taxes and the likelihood of a rate hike by the RBI.

The market borrowings by many states in FY22 has been lower than a year ago and this is attributed to their improved revenue position as well as the lower expenditure being undertaken by them. “The GST compensation shortfall payments to states (Rs 0.84 lakh crore in October and Rs 0.75 lakh cr in July), along with the normal bi-monthly GST compensation, could also be a factor that has necessitated lower borrowings by states,” CARE Ratings said in a report.

Adding to this, borrowing costs on SDL also got pressurised due to the rise in yields on G-Secs. The yield on benchmark securities touched a 20-month high on Tuesday and it has been rising for the last few days due to devolvement of three out of four bonds on primary dealers by the RBI in a weekly bond auction last week.

Sentiments has been affected because the current benchmark bond (6.10%-2031) has reached an outstanding amount of around Rs 1.5 lakh crore and market players are expecting the RBI to announce a new benchmark bond by the second week of January.

With this, the spread between G-Secs and SDL is between 50 and 70 bps. Traders expect it to rise to 60-90 bps as it usually does in the fourth quarter. “With G-Sec auctions coming to an end by end of January and February, the focus shall be now on the SDL auctions,” said Ajay Manglunia, MD and head institutional fixed income at JM Financial.

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