Borrowing costs

Borrowing costs for states are lowest since April

The yield on the G-Sec fell as a result of falling US Treasury yields and easing oil prices in the international market. Currently, the benchmark bond yield 6.10% -2031 is trading at 6.3657%.

By Manish M. Suvarna

The weighted average cost of borrowing on state development loans (SDLs), across states and tenure fell this week to the lowest since early April 2021, mainly due to lower borrowing States during the current fiscal year compared to the indicative borrowing schedule and the moderation in yields on government securities over the past few days.

In the current week, the average cost of borrowing was 6.62%, also 9 basis points lower than a week ago. The 10-year SDL weighted average yield was set at 6.89%, 3 basis points lower than a week ago.

“Many states expect borrowing requirements to decrease due to the significant improvement in state budget balances so far in FY22, which keeps the cost of borrowing at a level inferior. If G-Sec returns go down, SDL returns will follow, ”said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Market participants said most states that tap the market to raise funds through LDCs borrow less due to improved balances due to better goods and services tax (GST) collection than expected, the higher collection of VAT on petroleum products and the devolution of taxes. central government.

According to CARE Ratings, so far state borrowing in FY22 has been 13% below the indicative auction schedule for the period. The FY22 statements have so far increased Rs 4.06 lakh crore from Rs 4.66 lakh crore proposed in the indicative borrowing schedule. Maharashtra, Tamil Nadu, West Bengal, Uttar Pradesh, Rajasthan and Telangana are the top borrowing states so far in FY22, accounting for 66% of total borrowing. However, Odisha has not yet resorted to market borrowings so far this fiscal year.

The yield on the G-Sec fell as a result of falling US Treasury yields and easing oil prices in the international market. Currently, the benchmark bond yield 6.10% -2031 is trading at 6.3657%.

Public bank brokers said investor appetite for SDL has improved as it offers better yields and better security than corporate bonds, which has led to a tightening of SDL spreads against at the related maturity of G-Sec. The spread between the 10-year SDLs auctioned this week and the primary market yield of the 10-year G-Sec was 55 bps compared to a spread of 61 bps at the start of the month.

“We are also finding that a large number of investors have found the levels of SDL to be better and attractive than corporate bonds, which has resulted in a better appetite for government loans among businesses and institutional players.” said Ajay Manglunia, Managing Director and Head of Institutional Fixed Income, JM. Financial.

Market participants expect the spread to remain lower in the near term as SDL yields are expected to hover at current levels. “Spreads can stay in a 45 to 60 basis point band, which was previously 75 to 90 basis points,” Manglunia added.

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