Borrowing costs

State government borrowing costs drop after G-sec auction canceled

Bombay : State government borrowing costs fell more than 30 basis points at Tuesday’s State Development Loan (SDL) auction, a day after the Reserve Bank of India (RBI) canceled an auction of central government bonds which was to be the last of the financial year.

Up to 15 state governments have raised 17,783 crore on Tuesday at an average yield of 6.85%, down from 7.19% on March 16.

Ten-year SDL rates have risen 26 basis points since the start of February 2021 and 57 basis points since the start of 2021. However, they remain 75 basis points lower than at the start of fiscal 2021.

So far in the current fiscal year, 28 states and two union territories have accumulated a total of 7.36 trillion through market borrowing, 30% more than in the corresponding period of 2019-20. So far, states have cumulatively used 89% of projected market borrowing on the indicative schedule for FY21, CARE Ratings said.

“The reduction in uncertainty that was priced in disappears. In February, yields had risen without any change in fundamentals. This happened due to the decentralization of government bonds and the uncertainty of market dynamics. supply and demand in fiscal year 2022. However, the last two auctions were fully subscribed, and banks must value their bonds by March 31. It is therefore in everyone’s interest that bond yields are lower,” said Dhawal Dalal, Chief Investment Officer, Fixed Income, Edelweiss Asset Management.

Yields on government securities had risen by 30 basis points following the announcement of the government’s intention to raise additional borrowing of 80,000 crore till March and around 12,000 billion for the next fiscal year. In addition to rising borrowing, a spike in US Treasury yields also spooked markets.

Last week, the Reserve Bank of India (RBI) warned that rising bond yields could undermine the fragile global economic recovery, rendering most economies unable to tolerate high interest rates. In the monthly report on the state of the economy, RBI pointed to stubbornly high yields in the Indian bond market, warning that rising yields could prompt central banks to boost bond purchases.

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