Cost of state debt soars past 7%-mark

Proportion of under 10-year loans has risen to 23 % in Q3.

For the first time in the third quarter, the cost of state debt soared past the 7 percentage points levels with the weighted average cost settling at 7.01 %, up 16 bps over the past week, at the auctions held on Tuesday.

The weighted average cut-off of state debt auction hardened by 16 bps to 7.01 % with rise in cut-offs across tenors. Similarly, the spread between the 10-year state debt and G-sec rose to 50 bps from 47 bps in the last auction, Aditi Nayar, the chief economist at Icra Ratings said.

The rating agency attributed the hardened rates to the sharp 46 % higher-than-indicated demand for the week at ₹ 15,100 crore, which comes after a gap of seven auctions. In spite of this, the overall issuance declined by 17.7 % during so far this fiscal.

The issuance was high as five states borrowed ₹ 8,300 crore more than the indicated in the auction calendar.

Proportion of under 10-year loans has risen to 23 % in Q3 so far from 11 % in Q1 and 19 % in Q2 FY22, which also led to the spike in the cut-off rates, she said.

Lingering concerns over inflation and Monday’s unexpected announcement of the 3-day variable reverse repo auction by the RBI pushed G-sec yields higher. Moreover, in the light of the rising inflation in the U.S., the Federal Reserve had announced last week that it would double the pace of tapering of asset purchases, and also signalled three rate hikes in 2022, Nayar said.

As a result, the weighted average cut-off of the 10-year state debt stood at 6.96 % on Tuesday, 13 bps higher than last Tuesday. Accordingly, the spread between the 10-year weighted average state loans and G-secs yield rose to 50 bps from 47 bps, respectively, she added.

Another reason for the spike in the cut-off is the decline in availing of the ways and means advances facilities by the states from the RBI, to 150 days in October from 244 days in October 2020, possibly on account of the release of the balance amount of the back-to-back GST loan of ₹ 84,000 crore during that month.

Notwithstanding the aggregate decline, Andhra, Jammu & Kashmir, Manipur, Mizoram and Telangana accessed this facility for more than 25 days each in October. Additionally, the overdraft utilisation declined only mildly to 65 days in October 2021 from 68 days in October 2020, given the pick-up in usage by Jammu & Kashmir and Manipur.

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