Home >Industry >Banking >States see drop in borrowing cost post RBI announcement
FILE PHOTO: A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. REUTERS/Anushree Fadnavis/File Photo (REUTERS)
FILE PHOTO: A worker walks past the logo of Reserve Bank of India (RBI) inside its office in New Delhi, India July 8, 2019. REUTERS/Anushree Fadnavis/File Photo (REUTERS)

States see drop in borrowing cost post RBI announcement

  • The funds were raised at a weighted average borrowing cost of 6.5%, which is 30 bps lower than a week ago
  • The spread between 10-year SDL and government securities narrowed to 68 basis points, a decline of 20 basis points from a week ago

Mumbai: The borrowing costs for states have declined after the Reserve Bank of India announced plans to purchase state development loans (SLDs) through open market operations. 13 state governments raised a total of 19,250 crore through the auction held on Tuesday.

According to Care Ratings, the funds were raised at a weighted average borrowing cost of 6.5%, which is 30 bps lower than a week ago. The spread between 10-year SDL and government securities narrowed to 68 basis points, a decline of 20 basis points from a week ago, it said.

There has been a near sustained increase in the cost of market borrowings across states. Among the top 5 borrowing states, the weighted average cost of borrowing so far in October’20 is the highest for Andhra Pradesh at 7.01% followed by Karnataka at 6.83% and Maharashtra at 6.74%.

So far in the current fiscal year, 28 states and 2 union territories have cumulatively raised a total of 3.95 lakh crore via market borrowings compared to 2.59 lakh crore in the corresponding period of fiscal year 2019-20. They are expected to raise an additional 2 lakh crore during the October- December quarter.

Barring 7 states – Arunachal Pradesh, Jharkhand, Himachal Pradesh, Punjab, Manipur, Uttar Pradesh and Tripura, the borrowing of all the other states has seen a notable increase from year ago. Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka and Rajasthan have been top 5 borrowing states, accounting for 52% of the total borrowings by state governments so far in 2020-21.

On Friday, the Reserve Bank of India included the purchase of state development bonds for the first time through open market operations. While OMOs in central government securities are routine, this is the first time the RBI has announced OMOs for state government bonds

“In order to impart liquidity to SDLs (state development loans) and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. This would improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities," said Governor Shaktikanta Das.

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