States' average borrowing cost continues to remain almost flat at 7.68%

The borrowing cost of states continued to remain low for the second week with the latest auction on Tuesday seeing average yield staying almost flat at 7.68 per cent.

Many states stayed away from the market following disbursal of the tax devolution amount by the Centre earlier this month.

The weighted average yield/cut-off of State Government Securities (SGS) inched up by 1 basis point to 7.68 per cent at the auction on Tuesday compared to the past week despite a sharp increase in the weighted average tenor to 17 years from 12 years, Icra chief economist Aditi Nayar said in a note.

 

Normally bond prices change according to the tenor of the issue, and the 10-year bonds are considered the benchmark when it comes to pricing and also from a demand perspective.

At Tuesday's auction, the states issued bonds of varying tenor, peaking at 25 years (Tamil Nadu issued 25-year paper at 7.63 per cent) pushing up the median average tenor sharply to 17 years from 12 years last week.

However, the yield on the 10-year G-Sec (Government Securities) increased to 7.29 per cent from 7.26 per cent last Tuesday. These securities are issued by the central government.

Reflecting this, the weighted average cut-off of the 10-year SGS rose to 7.70 per cent from 7.67 per cent. Accordingly, the spread between the 10-year SGS and G-Sec yield remained unchanged at 41 basis points this week.

Seven states raised Rs 15,000 crore from the market, which is around 18 per cent lower than the indicated amount for this week.

According to Nayar, the trend of lower than-indicated SGS in November suggests the comfortable cash flow position of the states following the release of two instalments of tax devolution to the states by the Centre on November 10.

Nine states -- Chhattisgarh, Gujarat, Jharkhand, Kerala, Nagaland, Punjab, Rajasthan, UP and Bengal -- did not participate in Tuesday's auctions, despite indicating earlier that they might borrow Rs 11,600 crore this week.

While Tamil Nadu and Goa together borrowed Rs 700 crore less than indicated. Karnataka and Haryana issued additional SGS of Rs 7,000 crore and Rs 500 crore, respectively, the figures were more than what was indicated.

Meghalaya and Telangana issued securities worth Rs 400 crore and Rs 1,000 crore, respectively. These two states had not indicated their participation in Tuesday's auction.

As much as 53 per cent of the total issuance of Rs 15,000 crore was by Karnataka (Rs 8,000 crore). After nil issuance in April-October period, Karnataka has now raised Rs 12,000 crore in the last two auctions, up 20 per cent. Karnataka raised 15-year loan at a higher cut-off of 7.74 per cent compared to 20-year issuance at a 7.66 per cent, indicating an inverted curve, Nayar said.

Telangana raised 21-year and 22-year loans, and Tamil Nadu issued a 25-year paper at 7.63 per cent each. This was lower than the weighted average cut-off of 7.70 per cent, indicating healthy appetite for longer tenor issuance, she added.