At the inaugural weekly debt auction of the third quarter on October 3, the borrowing costs for Indian states saw a notable increase, reaching their highest level in 23 weeks. According to reports from PTI, 14 states collectively raised ₹22,500 crore through the issuance of state government securities. This borrowing cost surge comes despite a decrease in the average tenor of the securities.
Key Highlights:
Borrowing Costs Jump: The weighted average cost of borrowing for states climbed to 7.56 percent, marking the highest level in the past 23 weeks. This increase represents a 10 basis point rise compared to the previous week when it stood at 7.46 percent.
Steep Surge in Cut-offs: The auctions witnessed a significant rise in the cut-off rates across various tenors, contributing to the higher weighted average cost. This surge in borrowing costs occurred even as the average tenor decreased from 17 years to 13 years.
Spread Between State Bonds and G-Secs: The spread between the cut-off rates of 10-year state bonds and the new 10-year G-Secs (7.18 GS 2033) yield experienced a mild increase, rising to 33 basis points from 32 basis points recorded the previous week.
Annualized Borrowing Growth: States have borrowed 15.4 percent more on an annualized basis compared to the same period last fiscal year, totaling ₹19,500 crore.
Cumulative Borrowing in FY2023-24: Cumulatively, states have raised ₹3,80,500 crore from the debt market during FY2023-24. This figure represents a 28.6 percent increase compared to the same period in the previous fiscal year, according to Icra Ratings.
In addition to the state borrowing scenario, SBI Capital Markets Ltd. (SBICaps) has reported that the Indian government’s tax collections are expected to meet budget estimates for fiscal year (FY) 2024. The report suggests that any potential shortfall in excise duty revenue is likely to be offset by higher income tax collections.
The surge in borrowing costs for states underscores the dynamic nature of India’s debt market, influenced by factors such as tenor, demand, and market sentiment. Despite the increase in borrowing costs, states continue to access the debt market to fund various developmental and operational activities.
