States borrowing cost falls sharply to 6.81%

After spiking to a record 7.02 per cent last week, the borrowing cost for the states has declined sharply to 6.81 per cent at the weekly auctions held on Tuesday, mainly because they raised shorter tenor funds and 37 per cent less than notified.

Last week, the cost of debt for three states had peaked to the highest this fiscal at 7.02 per cent, up 12 bps over the previous week, despite most of the notified states drawing down less or not participating in the auctions.

According to rating agencies Icra and Care Ratings, the reason for the lower cut-off at 6.81 per cent was driven by the cut in the Central excise duty and VAT by some states on petrol and diesel but left the spread between the 10-year G-secs and state debt widened to 64 bps from 61 bps last week, as the duty cut will cushion the inflation. The Rs 17,000 crore GST compensation was another reason for the lesser appetite for funds this week.

Also the share of the 10-year state bonds in total issuance in Q3 declined to 44 per cent from 52 per cent in Q2, leading to the massive decline in the cut-off. As a result, the weighted average cut-off decreased by 21 bps to 6.81 per cent, led by a decline in cut-offs across tenors.

According to Care Ratings, the weighted average cost of borrowings across states and tenures declined by 21 bps to 6.81 per cent from last week, while the weighted average yield of the 10-year state bond was 6.93 per cent, lower by 6 bps from the last week.

So far this fiscal, the state borrowings have declined by 16.4 per cent on an annualised basis, and today's auction was a whopping 37 per cent lower than indicated as six states undertook lower-than-indicated borrowings while Andhra borrowed Rs 1,000 crore even though it had not earlier indicated to do so.

At today's auctions, five states raised Rs 6,000 crore, which is 37 per cent less, and this would have been lower having it not been for Andhra, which despite not being part of the indicative calendar raised Rs 1,000 crore. Five states that were listed in the calendar did not participate in the auction.

Market borrowings by the states so far are 16 per cent less than that in the corresponding period of the last fiscal, as 27 states and two UTs have raised Rs 3.88 lakh crore so far against Rs 4.64 lakh crore a year ago -- down 12 per cent year-on-year.