Cash-strapped states continue to pay more for their loans in the market, being forced to offer yields close to 7% even as the system is overflowing with liquidity amid moderate interest rates, according to a report.
The six states that went into the market to auction state government securities on Monday to raise Rs 8,700 crore were to offer 6.96% on a weighted average level, a paltry 3 basis points (bps) of less than previous weekly auctions.
A 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 states and tenures was 6.96 percent, just 3 basis points lower than the auctions held last week. The drop can be attributed to easing global crude prices after major oil producers agreed over the weekend to increase oil production, Care Ratings said.
The cost of borrowing in the market for states has risen to more than 6.9% since the third week of June. It has risen 21 basis points since mid-June and 40 basis points since April 8, according to the report.
The spread between 10-year government bonds and the secondary market yield of new 10-year G-sec bonds remained stable at 88 bps, as last week. Spreads fell around 50bp at the start of April.
The cost remains high although government borrowing has so far been 13% lower on an annual basis. Twenty-three states and Delhi have raised a total of Rs 1,868,850 crore so far for this fiscal year, compared to Rs 2,13,776 crore borrowed year-over-year.
According to the tentative borrowing schedule, 26 states and Delhi were to sell a debt worth Rs 2,550 crore as of now, but they only raised 87% of this and that too by 23 states and Delhi.
The lower amount of borrowing in the market reflects the decline in state spending following the second wave of COVID-19, which resulted in a decline in both income generation and revenue collection.
Compared to last year, 14 states have borrowed less or have not borrowed at all. While Kerala, which paid 8.96 percent last April for five years, has borrowed up to 33 percent less this year, for Tamil Nadu it is down 21 percent.
On the contrary, Karnataka has not raised any funds on the market at all. This is notable because last year the state raised Rs 12,000 crore in the year to date (YTD).
But YTD borrowings were higher for Uttar Pradesh (67%), West Bengal (17%), Telangana (14%) and Rajasthan (6%).
Tamil Nadu, Maharashtra, Rajasthan, Andhra Pradesh and Telangana have been the top five borrowing states so far this year, accounting for around 60% of total borrowing.
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