States’ market borrowing set to get costlier

10-yr SDL yields rise 24 bps in a month

States will find it costlier to raise money from the bond market, following the Centre’s offer on Thursday. States were told by the Centre to borrow from the market, amid the shortfall in GST revenues.

Yield on the 10-year state government paper (called state development loans or SDL) has risen 24 basis points (bps) so far in August, to 6.666.68 per cent. Yields on the three-year SDLS have jumped 35 bps to 5.09 per cent this month. Treasury and bond dealers said that while this surge was more due to the rise in yields on inflation concerns, there could be an increase in spread over the 10-year government of India benchmark owing to the overhang of SDLS.

Borrowings by states take place mainly through issuance of securities, with a tenor of 10 years. Close to 37 per cent of SDL issuances in the first five months of FY21 carry a tenor of 10 years, CARE Ratings said.

The three-year SDLS have the second-highest share of issuances (11 per cent) followed by the 30-year SDLS (8 per cent). From April 7August 25, 26 states and 1 UT cumulatively raised ~2.7 trillion. This is a 53 per cent rise from the ~1.76 trillion in FY20 (April 9-August 27).

State borrowings in H1FY21 at ~3.45 trillion are likely to be 53 per cent more than that in H1FY20, according to an indicative borrowing calendar.

Of the 26 states to have issued SDLS in FY21, 11 have seen their market borrowings rise 50 per cent and above, when compared to the corresponding period of last year. Borrowings by eight states has been lower. Two states have not raised funds in FY21, according to CARE.