State Debt

In the second-highest auction so far in FY23, 13 states raised Rs 25,800 crore in debt capital from markets on Tuesday, paying a higher price as the cost rose by 4 basis points to 7.68 per cent. The latest auction is 9 per cent higher on-year basis but was 19 per cent lower than indicated for this week in the auction calendar, according to a note by Icra Ratings. The weighted average cut-off or the interest rate payable annually by the states, rose by a further 4 basis points to 7.68 per cent over the past auction, Icra Ratings chief economist and head of research & outreach Aditi Nayar said in the note. She said while the weighted average tenor rose to 15 years from 13, the yield curve was inverted at the longer-end. Accordingly, the spread between the 10-year state bonds also called state development loans and the benchmark G-sec (Government Securities) yield rose to 33 basis points from 30 basis points last week.

States on Tuesday got some reprieve in their debt cost with the weighted average price falling by 12 bps to 7.67 per cent due to receding appetite from issuers as they received tax payouts from the Centre last week. Assam, Bihar, Karnataka and Punjab have raised Rs 8,800 crore from the market at the auctions, which is nearly 31 per cent lower than the Rs 12,800 crore indicated for this week. According to Icra Ratings, the states have been drawing less from the market as the Centre has released two instalments of tax devolution aggregating to Rs 1.2 lakh crore on November 10, which eased their cash-flow position, leading to some states skipping the auction. The additional devolution in November may continue to drive the trend of lower-than-indicated borrowings in the coming weeks, the agency said. As a result, at the auctions today, the weighted average cut-off declined by 12 bps to 7.67 per cent from 7.79 in the last auction, amid a stable weighted average tenor at 12 years, the ..

So far this fiscal, the issuance of State Development Loan (SDL) as state debt is known, has declined 40 per cent as 10 states did not participate in the auctions conducted so far.

According to Icra Ratings, the indicative borrowing calendar indicated 28 states and two Union territories to raise Rs 8.96 lakh crore.

The maximum addition in states'' borrowings has taken place this fiscal due to the pandemic that has eaten away their revenue by 21.2 per cent, it said

The maturity profile of states' debt suggest that redemption pressure is likely to double from 2026 onwards

The RBI pointed out that redemption pressure on state loans will start rising from 2018-19 and reach a peak in 2026-27.

Redemption pressure on states, which normally issue plain vanilla bonds with 10-year maturity, increased from the year ended March 2018, according to the RBI's Study of State Finances

Populism and profligacy undercut India's fiscal stability