Cash-starved states are continuing to pay higher for their market borrowings, being forced to offer yields close to 7 percent even as the system is awash with liquidity amid benign interest rates, as per a report.
The six states which went to the market to auction state government securities on Monday to raise Rs 8,700 crore had to offer 6.96 percent on a weighted average level, a paltry 3 basis points (bps) lower than the previous weekly auctions. Higher cost forced Haryana to reject the entire bid for its Rs 1,000 crore auction, while other states accepted the notified amount.
The weighted average cost of borrowing across the states and tenures was 6.96 percent, just 3 bps lower than the auctions held last week. The decline can be attributed to the easing of the global crude prices following the major oil producers agreeing over the weekend to boost oil output, Care Ratings said.
The cost of market borrowings for the states has been ruling over 6.9 percent since the third week of June. It has risen by 21 bps since mid-June and by 40 bps since April 8, the report said.
The spread between the 10-year state bonds and the secondary market yield of new 10-year G-secs was stable at 88 bps, the same as last week. The spreads have risen from around 50 bps in early April.
The cost remains high despite the borrowings by the states so far being 13 percent lower on an annual basis. Twenty-three states and Delhi have raised a total of Rs 1,86,850 crore so far this fiscal, as against Rs 2,13,776 crore borrowed y-o-y.
According to the tentative borrowing calendar, 26 states and Delhi were to sell debt worth Rs 2,22,550 crore as of now, but they have raised only 87 percent of this and that too by 23 states and Delhi.
The lower quantum of market borrowings is reflective of the states' lower expenditure following the second wave of COVID-19, which led to both revenue generation as well revenue collection dropping. Compared to last year, 14 states have either borrowed less or not borrowed at all.
While Kerala, which had paid 8.96 percent last April for five-year money, has borrowed as much as 33 percent less this year, for Tamil Nadu it is 21 percent down.
On the contrary, Karnataka has not raised funds from the market at all. This is notable as last year the state had raised Rs 12,000 crore during year to date (YTD). But YTD borrowings have been higher for Uttar Pradesh (by 67 percent), West Bengal (17 percent), Telangana (14 percent) and Rajasthan (6 percent).
Tamil Nadu, Maharashtra, Rajasthan, Andhra Pradesh and Telangana have been the top five borrowing states so far this year, accounting for around 60 percent of the total borrowings.