Home / Markets / Mark To Market /  States paid a higher price to find bond investors in FY21

The central and state governments faced a double whammy of a sharp fall in revenues and rise in expenditure owing to the pandemic. Ergo, the increase in government borrowing for both the Centre and states doesn’t come as a surprise. But states have borrowed marginally less than what their indicative calendar showed earlier. On the other hand, the central government ended up borrowing more.

The indicative calendar for state governments had put the total borrowing at 8.24 trillion, but states borrowed only 7.98 trillion, data from the Reserve Bank of India (RBI) show.

Ballooning up
View Full Image
Ballooning up

Four states and two Union territories borrowed less than the indicative calendar. Five states saw borrowing fall from a year-ago period, but these form only a small part of the overall bond supply.

Of course, on an aggregate basis, state bond supply has surged by 25.4% from the year-ago period. That is because large states, which make up for over 80% of total state borrowings, increased their borrowings substantially.

A Care Ratings Ltd analysis said states’ borrowing cost had gone up in the final auction. In fact, states have coughed up a higher price in most auctions, partly because of the rise in yield of central government securities. State bonds are typically priced through a spread over the 10-year central government bond.

In other words, states have borne the brunt of the Centre’s borrowing even though they may have ended up borrowing lower than what they intended to in FY21. Meanwhile, the central government has borrowed far more than what it had originally intended.

To be sure, the borrowing plan was revised upwards thrice in FY21. On an aggregate level, the Centre borrowed 12.8 trillion through dated securities.

The burden on the market was visible as a handful of auctions failed to elicit enough demand and some were also cancelled by the RBI.

The 10-year benchmark bond yield ended FY21 on a marginally higher note despite the RBI buying more than 3 trillion through open market operations and taking a series of liquidity measures.

In the new financial year, the extent of the RBI’s bond purchases would be critical not just for the Centre’s borrowing cost, but also for states.

Know your inner investor Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Take the test
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Recommended For You

Get the best recommendations on Stocks, Mutual Funds and more based on your Risk profile!

Let’s get started
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout