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States Borrowing Cost Remains High At 7.86% Despite Fall In G-Secs Yield To 7.39%

The borrowing cost for the states continues to remain elevated, sniffing at the 7.9% mark for the fourth consecutive week despite the average cut-off slipping marginally by 2 basis points to 7.86% at the latest auction of debt on Tuesday.

Nine states raised Rs 13,500 crore through state development loans at the first auction of the second quarter, which is nearly 4% higher than the indicated amount for this week as Gujarat accepted an additional Rs 500 crore while the remaining eight states borrowed in line with the amount indicated in the auction calendar, according to an ICRA analysis.

Still the overall issuance is still 9.4% lower than the year-ago period. Cumulatively, 19 states raised Rs 1,23,700 crore so far this fiscal, which is nearly 22% lower than the year-ago level when it was Rs 1,59,500 crore.

The weighted average cut-off declined by 2 basis points to 7.86% from the last auction, amidst stable weighted average tenor at 15 years. The yields had peaked at 7.91% in the auction held on June 22, ICRA chief economist Aditi Nayar said in a note.

The rates remain elevated as the cost for Punjab jumped to 8.04% and for Telangana and Andhra at 7.90%.

The spread between the G-secs and SDLs widened to 42 basis points as the benchmark rates for the Centre declined to 7.39% on Tuesday from 7.47% last Tuesday, reflecting the expectation of a lower slippage in the FY2023 fiscal deficit after it recently levied cesses on domestic sales of crude and export of fuels and increased the import duty on gold.

The weighted average cut-off for the 10-year SDL eased mildly to 7.82% from 7.85% last week. Accordingly, the spread between the weighted average 10-year SDL and 10-year G-sec yield increased to 43 basis points from 38 basis points.

Another feature of the auction is that as much 56% of the issuances were in the longer tenors SDLs, 23% were in the medium-terms and only 21% were in the 10-year maturity bucket.

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