The weighted average yield on states' market borrowings declined by 7 basis points to 7.61 per cent at Tuesday's auction on lower issuance as a number of states stayed away from the market.
GST compensation to states
States have been given two installments of the central tax devolution on November 10 and an installment of Rs 17,000 crore of the Rs 35,300 crore pending GST compensation on November 24, reducing the borrowing requirement of the states.
Why did the issuance fall?
The issuances fell also because the states were using the Reserve Bank's liquidity windows -- the ways and means advances (WMA) and the overdraft facility (OD) -- which increased to 155 days and 57 days, respectively in September from 127 and 28 days, respectively in August.
At the latest auction of state government securities, only nine states went to the market raising Rs 12,700 crore, which is 56.4 per cent lower than the indicated amount for this week, according to an analysis by Icra Ratings. However, cumulatively, the overall issuance is down only 2 per cent on-year.
Overall, November saw Rs 57,200 crore of state bond issuance only, which is 42 per cent lower than the Rs 98,200 crore indicated for this month in the auction calendar. In absolute terms, the gap between the actual and indicated issuance of Rs 41,000 crore in November is the largest monthly gap in FY23 so far, the agency's chief economist Aditi Nayar said in a note.
Accordingly, the weighted average cut-off/yield declined by 7 basis points (bps) to 7.61 per cent on Tuesday from 7.68 per cent in the last auction; the weighted average tenor also declined to 14 years from 17 years last week.
Yields falling across debt market
In fact, the yields have been falling across the debt market as is visible from the benchmark 10-year G-sec (government securities) yield, which inched down by 1 bps to 7.28 per cent. But the weighted average cut-off of 10-year state debt fell more sharply - to the tune of 8 bps -- to 7.61 per cent this week. Accordingly, the spread between the 10-year state bonds and G-sec yield narrowed sharply to 33 bps from 41 bps last week.
Normally, bond prices change according to the tenor of the issue and also on the quantum, and the 10-year bonds are considered the benchmark when it comes to pricing and also from a demand perspective. At today's auction states issued bonds of varying tenor, peaking at 25 years and the lowest being three years and taking the median tenor to 14 years from 17 years last week.
Why was the supply down?
The supply was down primarily because the traditionally big borrowers such as Madhya Pradesh, Maharashtra, Rajasthan, Sikkim, Tamil Nadu, Telangana, Uttarakhand, Uttar Pradesh and Bengal did not participate in today's auction, even though they had indicated a combined borrowing of Rs 17,100 crroe for the week.
Moreover, Andhra Pradesh, Goa and Punjab together borrowed Rs 2,000 crore less than indicated. However, Karnataka and Kerala drew down Rs 2,000 crore and Rs 500 crore, respectively, more than indicated. Also, Jammu & Kashmir borrowed Rs 500 crore even though it did not indicate its participation.
