Dovish RBI has state debt cost plunging 13 bps, yet trending over 7.10%

New Delhi: The dovish monetary policy last week coupled with lower demand helped ease the weighted average cut-off of state government debt issuances by 13 bps to 7.11 percent at Tuesday's auctions in spite of an increase in their tenors.

Seven states and Delhi raised Rs 12,100 crore in state development loans (SDLs), as state government securities are known, a massive 38 per cent lower than the indicated level for this week.

This also had the spread between the 10-year SDLs and G-secs narrowing to 40 bps from 48 bps last week, according to an analysis by Icra Ratings.

Seven of the 12 states which had initially indicated a borrowing of Rs 9,800 crore, did not participate in Tuesday's auction. Additionally, Tamil Nadu borrowed Rs 1,000 crore less than indicated.

However, Gujarat, Jammu and Kashmir and Rajasthan together borrowed Rs 3,100 crore, even though they had not initially indicated that they would participate in the auction. Assam borrowed Rs 400 crore more than the indicated amount.

Overall, Tuesday's issuance was nearly 33 per cent lower than the year-ago level when it was Rs 17,900 crore.

Cumulatively, 29 states, except Odisha, have borrowed Rs 5.86 lakh crore so far in FY22, nearly 12 per cent lower than the year-ago level when it was Rs 6.67 lakh crore.

At Tuesday's auction, Rs 8,600 crore or 71 per cent of the total issuance was raised in longer tenors; Rs 3,000 crore or 25 per cent in the 10-year bucket; and the remaining Rs 50 crore or 4 per cent in 7-year tenor.

Interestingly, Tamil Nadu raised Rs 1,000 crore at an attractive 7.13 per cent compared to 15-year issuance by Karnataka and Punjab at 7.12 per cent each.

This had the weighted average cut-off of the aggregate issuance softening by 13 bps to 7.11 per cent, from 7.24 per cent last Tuesday, despite the weighted average tenor increasing to 15 years from 12 years.

This is similar to the easing seen in the 10-year G-secs; (6.54 per cent, 2032) yield, which closed at 6.67 per cent, 14 bps lower than last Tuesday, Aditi Nayar, chief economist at Icra, said.

According to her, this easing reflects several factors, including the unchanged reverse repo rate last week compared to the expectations of a hike, the overall dovish tone of the monetary policy as well as cancellation of the G-sec auction of Rs 24,000 crore initially scheduled for February 18.