Borrowing costs

State government borrowing costs rise as yields rise

MUMBAI: State governments are paying a high price for their borrowing as yields rise in money markets. State governments saw their borrowing costs increase by 9 to 14 basis points (100 basis points = 1 percentage point) compared to last month.
The RBI had announced that an auction of government bonds (State Development Loans, or SDLs) would take place on Tuesday. These were issued by 12 state governments, totaling Rs 20,659 crore. The terms of these bonds ranged from five years to 20 years.
The largest borrower, the state of Uttar Pradesh (at Rs 3,000 crore) sold its 10-year bonds at a threshold yield of 7.24%. Among the other states that have opted to issue a 10-year paper, West Bengal has set the price of its bonds at a yield limit of 7.23% against 7.14% last fortnight. The 10-year Bihar was at 7.24% and Goa & Manipur sold at 7.23%. On January 4, the 10-year yield was 7.10%. As a result, the overall cost increased by 0.14%.
“Bond yields are climbing higher on inflation and fiscal concerns. The borrowing program for next year is being worked out. And, with redemptions of around Rs 4 lakh crore, it there will be a big borrowing program again,” said Bank of Baroda chief economist Madan Sabnavis, noting that oil prices were adding to inflationary pressures.
The cost is higher than what triple-A rated companies pay for their borrowings. For banks, there is no credit risk in buying the state government loans auctioned by the RBI. Contrary to the borrowing of a public company from a State, the repayment of the interest and the principal of these loans is ensured by the central bank by drawing on the accounts of the States. All state governments have accounts with the RBI, where central government transfers are parked.
However, there is a liquidity risk and a higher market risk. The market for these bonds is not as deep as central government bonds, which is why price movements are likely to be more volatile.
According to a Care Ratings report released in December, with the size of consolidated state budgets larger than the center, the responsibility for development is almost evenly split between the center and the states. According to various budgets, the expenditure of the Center stands at Rs 34.8 lakh crore for FY22 against consolidated Rs 42.9 lakh crore for the States. “In fact, with the Finance Committee imposing higher transfers to the states from the Center’s revenue collection (41%), the role of the states has increased,” the report says.