Huge issuance of state loans may raise borrowing cost for corporates

On a gross basis, states are estimated to borrow between Rs 5.5 trillion and Rs 5.7 trillion in the next fiscal year

States are elbowing out corporate firms from the money market. As borrowing by states balloons and matches that of the Centre’s, corporate entities are likely to feel the heat, especially with their widening spread over benchmark government bonds refusing to come down.

The spread between 10-year corporate bonds and benchmark 10-year government bonds is now about 100 basis points and has been in this territory since the Infrastructure Leasing & Financial Services (IL&FS) crisis. Huge issuance of state development loans (SDLs), or bonds issued by states, has only compounded this problem.

On a gross basis, states are estimated to borrow