State Government Borrowing Costs Ease Marginally
States have borrowed Rs 44,778 crore so far in April compared to Rs 29,572 crore in April last year.
Borrowings costs for state governments eased marginally at an auction held on Monday. Nine state governments raised Rs 12,128 crore at the latest auction.
Details released by the RBI showed:
- States had offered to sell Rs 13,128 crore in bonds but raised a little less than that.
- Andhra Pradesh did not accepted any bids for 6-year and 7-year bucket.
- Odisha has accepted an additional amount of Rs 500 crore.
- The borrowing cost for 10-year bonds was close to 7.65 percent, about 117 basis points over the 10-year central government bonds.
The spread, or the additional amount over the so-called risk free rate that investors demand, for state government bonds have been elevated as a consequence of both both higher planned borrowings and increased uncertainty due to the Covid-19 outbreak.
Investors demanded a spread of 140-160 basis points above the 10-year central government bond yield of 6.4 at previous auction on April 7. Since then, the government clarified that states are being permitted to borrow Rs 3.2 lakh crore in the April-December period.
Clarity on the size of borrowings helped bring down spreads at Monday’s auction.
Borrowings Front-Loaded
State governments have borrowed a total of Rs 44,778 crore so far in the first month of the current financial year, compared to raising Rs 29,572 crore worth of state development loans in the whole of April last year.
This is because they are facing a sudden stop in revenues due to restrictions on normal business activities amid the Covid-19 outbreak. Expenses, meanwhile, have surged.
In a note dated March 31, Soumya Kanti Ghosh, chief economist at State Bank of India, wrote that the fiscal deficit for state governments could rise to 3.5 percent of gross state domestic product from the budgeted 2.06 percent of GSDP, unless backed up by capital expenditure cuts.
In March, the RBI has increased the limit under ‘Ways and Means Advances’ facility by 30 percent for short-term borrowings for state governments and also has given some short-term flexibility to states in managing their cash flow mismatches.