States paying through the nose for debt as cost soars past 7.16%

The cost of debt funds for states has touched the highest level so far this fiscal with the weighted average cut-off crossing the 7.16 percentage points at the latest auctions, up 11 basis points (bps) over the past week, reflecting the hardening yields even for the government securities.

The hardening of rates at the first auction of the quarter comes in the wake of the expected large supply of debt from the states, as indicated for the fourth quarter at Rs 3.2 lakh crore, up by Rs 10,000 crore.

Nine states on Tuesday raised Rs 18,900 crore at the latest auction of state development loans. The auction was just 2 per cent lower than the indicated amount for this week, which is among the highest drawdowns so far this fiscal, Aditi Nayar, the chief economist at the rating agency Icra said in a note.

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Even though the weighted average tenor remained unchanged, at 12 years, in line with the last auction, the weighted average cut-off rose sharply by 11 bps to 7.16 per cent from 7.05 per cent, reflecting a large supply for the quarter.

On the other hand, the weighted average cut-off for the 10-year loans hardened by 10 bps to 7.13 per cent today from 7.03 per cent last Tuesday, Nayar said.

Meanwhile, the benchmark 10-year Government Securities (G-sec; 6:10 GS 2031) yield rose by 4 bps to 6.52 per cent from the last auction. Accordingly, the spread between the 10-year weighted average SDL [State Development Loans] and 10-year G-sec yield widened to 61 bps from 55 bps, she said.

Gross SDL issuance is pegged at Rs 7.9 lakh crore in the current fiscal (FY22), just 1 per cent lower than the FY21, while the net issuance is estimated at Rs 5.8 lakh crore for FY22, which is 11 per cent lower than the last year, adjusting for expected redemptions of Rs 2.1 lakh crore in the current fiscal. The net SDL issuance is projected at Rs 5.8 lakh crore in FY22, a decline of 10.9 per cent from Rs 6.5 lakh crore in FY21, Nayar said.

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The issuance was down 15 per cent during April 2021-January 4, 2022, led by 21 states/UTs on January 5, which was just 2 per cent lower than indicated for the week in the revised auction calendar, as Punjab only partially accepted bids and Haryana did not accept its Rs 500-crore greenshoe option.

The revised auction calendar issued by the RBI on January 3 pegged the market borrowing by 26 states (except Manipur and Odisha) and two union territories at Rs 3.2 lakh crore, up from Rs 3.1 lakh crore indicated on December 31, 2021.

The upward revision in the Q4 auction calendar is on account of Madhya Pradesh, which has increased to borrow Rs 11,500 crore in Q4 compared to nil in the calendar issued on December 31, 2021. Additionally, Andhra Pradesh has indicated that it will raise Rs 25,500 crore in Q4, which is Rs 2,500 crore higher than indicated earlier.

The divergence in the actual and indicative quarterly borrowing calendar by the states as well as the revision in the indicative borrowing calendar within a few days after the original announcement points to a less-than-robust process of planning their borrowing requirements, Nayar said and pointed out that such changes temper the usefulness and reliability of the borrowings calendar, which is 27 quarters old.

In the January 5 auction, Rs 10,700 crore or 56 crore of the total was in 10-year debt and the balance of Rs 8,200 crore was in longer tenors.

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