Maharashtra Raises Funds At Near Record Low Rates As Demand For State Bonds Rises

Maharashtra raised Rs 1,500 crore at 4.76%.

BQ Desk @bqprime

24 Jun 2020, 12:10 AM IST

A person pushes a cart near the empty Gateway of India arch-monument in Mumbai during a lockdown. (Photographer: Dhiraj Singh/Bloomberg)

The fundraising environment for state government bonds has turned sharply in a matter of a few months. While the first auction for state development bonds in April this year had seen rates surge due to an expected spike in borrowings, recent auctions have seen interest costs plummet.

A stark example of this emerged at Tuesday’s auction. Maharashtra raised three-year bonds at near record lows for state government debt. It raised Rs 1,500 crore at 4.76%. While the planned borrowing was at Rs 1,000 crore, the state’s bond issue drew more than seven times the demand with bids of Rs 7,565 crore from 102 investors, according to auction results released by the Reserve Bank of India on Tuesday. Given the high demand, the state retained an additional Rs 500 crore as a greenshoe option and raised a total of Rs 1,500 crore. The issue was eventually bought out by only three investors. BloombergQuint could not ascertain the names of the investors.

At 4.76%, the spread demanded by investors over three-year central government bonds was at a narrow 26 basis points. At the June 9 auction, the state had raised 2-year bonds at 4.45%, a spread of a mere 5 basis points over central government bonds.

While the falling cost and narrowing spreads were most discernible for the three-year bond issue by Maharashtra, borrowings costs fell for other states too.

Goa, Rajasthan and Telangana raised 10-year bonds at beyond 6.58% and 6.60%.
Tamil Nadu raised 9-year bonds at 6.60%.
Tamil Nadu and Rajasthan raised 30-year bond at 6.70%.

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Demand At The Short & Long End

The market for state bonds has seen interest emerge for shorter dated securities but also for paper with maturity of 30 years. The most commonly used 10-year maturity is seeing the highest spreads over central government bonds.

The demand is emerging from banks, mutual funds at the short end and insurance companies at the long end.

“India bonds have performed well this fiscal year despite the increase in supply; this was due largely to an increase in demand from commercial banks. As of June 5, commercial bank purchases of government securities (central government bonds + state development loans) totaled Rs 4.7 lakh crore,” Nomura Global Market Research pointed out in a note on Monday. One factor behind this increased demand for central and state government securities is the pick-up in deposit growth and the subdued credit growth, Nomura said.

While falling borrowings costs may help states, the macro-economic signal in them is not encouraging.

If sovereign bonds yields are true reflection of the growth-inflation outlook, the current yields on central and state government securities signal a protracted and low growth regime. It also shows a strong divergence between the momentum seen in equity market and the debt market outlook.

Soumyajit Niyogi, Associate Director, India Ratings & Research