Low weighted average cost of government loans over 8 weeks in high demand

The weighted average cost of government development loans (SDLs) fell to an eight-week low due to strong investor demand and lower borrowing from states and Union territories after offsetting the goods and services tax (GST) by the central government. Across all maturities, the weighted average cost of borrowing for states stood at 6.87% on Aug. 10, 11 basis points lower than a week ago, according to a CARE report.

“Basically the amount notified in the auction was less than the budgeted amount and the lack of a longer term document and good demand from mutual funds, insurance companies, EPFO , among other things, has resulted in lower borrowing costs, ”said Ajay Manglunia, Managing Director. & Head, Institutional Fixed Income at JM Financial.

Falling borrowing costs can also be attributed to falling global prices for crude oil and industrial metals, which have allayed concerns about inflation. According to data compiled on the Reserve Bank of India website, states and UTs have raised Rs 40,300 crore, up from just over Rs 63,000 crore shown in the indicative borrowing schedule for the past four weeks. . Borrowing fell almost 35% after the Center cleared the GST to states.

“With the release of the GST compensation loan of Rs 75,000 crore by the Indian government to state governments in a single installment on July 15, 2021, the states’ cash position appears to have eased. As a result, SDL issuance remained below forecast for the fourth week in a row, ”rating agency ICRA said in a report.

On July 15, the government gave Rs 75,000 crore to the states to make up for lost revenue due to the implementation of the GST. The amount was about half of the crore of Rs 1.59 lakh, which was agreed to be borrowed by the Center under the current exercise and passed on to States and UT. Over the past four weeks, SDL emissions have remained low and so has the August 10 auction, with seven states and one UT increasing Rs 12,100 crore, significantly below the indicative level. Five states, which initially said they would borrow Rs.7,200 crore, did not participate in the auction.

However, 23 states and one UT only raised 85% of the total of Rs 2.58 lakh crore, which was on the verge of being lifted by the 28 states and one UT during the period from April 8 to 21. August, according to the provisional borrowing schedule. The borrowing was lower because five states such as Karnataka, Himachal Pradesh, Jharkhand, Odisha and Tripura have yet to use the market to raise funds.

At the same time, the weighted average limit of shorter tenor SDLs also fell 19 basis points to 6.48% on August 10, from 6.67% last week. Indeed, issues with shorter maturities rose sharply in the second quarter of the current fiscal year.