Weighted average cost for state loans at 8-week low on high demand

The weighted average cost for state development loans (SDLs) fell to an eight-week low due to great demand from investors and lower borrowings by states and Union Territories after goods and services tax (GST) compensation by the central government. Across tenors, the weighted average cost of borrowing for states stood at 6.87% on August 10, which was 11 basis points lower than a week ago, said said a CARE report.

“Basically, the notified amount in the auction was less than the budgeted amount and the absence of longer tenure paper and good demand from mutual funds, insurance companies, EPFO, among others, led borrowing cost to fall,” said Ajay Manglunia, managing director & head, Institutional Fixed Income at JM Financial.

The fall in borrowing costs can also be attributed to the fall in global prices of crude oil and industrial metals, which have eased concerns over inflation. According to the data compiled from the Reserve Bank of India’s website, states and UTs have raised Rs 40,300 crore as against just over Rs 63,000 crore showed in the indicative borrowing calendar for the last four weeks. Borrowing is down almost 35% after the Centre compensated GST to the states.

“With release of the Rs 75,000-crore GST compensation loan by the Government of India to the state governments in a single installment on July 15, 2021, the cash-flow position of the states appears to have eased. Reflecting this, the SDL issuances have remained lower-than-indicated for the fourth consecutive week,” ratings agency ICRA said in a report.

On July 15, the government had given Rs 75,000 crore to the states as a make-up for the shortfall in their revenues because of the GST implementation. The amount was about half of the Rs 1.59 lakh crore, which was agreed to be borrowed in the current fiscal by the Centre and passed on to the states and UT. For the past four weeks, the SDL issuances remained low and on August 10 auctions too, with seven states and one UT raising Rs 12,100 crore, sharply lower than indicative level. Five states, which have initially indicated that they would borrow Rs 7,200 crore, did not participate in the auction.

However, 23 states and one UT have raised just 85% of the total Rs 2.58 lakh crore, which was about to be raised by the 28 states and one UT during the period of April 8 to August 21, as per the tentative borrowing calender. The borrowing was less as five states such as Karnataka, Himachal Pradesh, Jharkhand, Odisha and Tripura have not yet tapped the market to raise funds.

Meanwhile, the weighted average cut-off on shorter tenor SDL also declined by 19 basis points to 6.48% on August 10, compared to 6.67% in the last week. This was because the issuance of shorter tenor rose sharply in the second quarter of the current financial year.