Notwithstanding the Rs 10,000-crore liquidity infusion through the G-Sap route by the RBI last week and fewer states tapping the bond markets, their cost of borrowing has been heading north, as the coupon hit the highest level since mid-March at 7 per cent.
With this, the weighted average yields of state bonds have risen by a whopping 44 bps since the first auction of the fiscal on April 8, according to an analysis by Care Ratings.
The borrowing cost across the states and maturities rose to the highest level since mid-March, reversing the decline seen at last week's auction at 7 per cent in today's auctions of state government securities, which is a full 24 bps higher than last week, the agency noted.
Ahead of the Rs 10,000-crore secondary market purchase of state debt on June 17 under the G-Sap (government securities acquisition programme), the average cost had fallen 20 bps to 6.75 per cent at the auction on June 15. This was the sharpest fall in months.
The agency's chief economist Madan Sabnavis and senior economist Kavita Chacko attribute the increase in yields to concerns over the inflation trajectory as crude is trading over a two-year high now. Firming inflation raises concerns over the RBI's ability to maintain the accommodative monetary policy stance.
At 7 per cent, the weighted average yield of state debt has risen by a whopping 44 bps since the first auction of the fiscal on April 8. And this takes the spread between the 10-year state bonds auctioned today and the 10-year G-Secs yield is 86 bps now.
The spreads have risen from around 50 bps in early April, reflective of the firming of yields for state bonds, the economists said, adding the yields have been on the run because of the concerns over the anticipated higher supply.
At today's auctions, 10 states raised a total of Rs 19,600 crore. While Maharashtra accepted an additional amount of Rs 500 crore, other states accepted only the notified amount. With today's borrowing, the states' aggregate borrowings so far this fiscal is 20 per cent less than the year-ago period.
So far, 18 states and Delhi have raised Rs 1,23,950 crore as against Rs 1,55,276 crore raised this time last fiscal by 22 states and Delhi.
According to the tentative borrowing calendar, 26 states and Delhi were to mop up Rs 1,64,400 crore by now, but only 80 per cent of this amount has been raised thus far by 19 states and Delhi.
The lower quantum and fewer number of state tapping the market so far can largely be ascribed to their lower expenditure amid the pandemic as well as availing of the leeway provided by the RBI by means of special drawing facility and the higher ways and means advances both of which are priced at the repo rate.