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The central bank’s decision to conduct OMOs for state bonds comes against the backdrop of the tussle over goods and services tax (GST) compensation between the central and state governments. Mint
The central bank’s decision to conduct OMOs for state bonds comes against the backdrop of the tussle over goods and services tax (GST) compensation between the central and state governments. Mint

States see borrowing cost drop after RBI measures

13 states raised a total of 19,250 crore at a weighted average borrowing cost of 6.5%

The borrowing costs for states have declined after the Reserve Bank of India (RBI) announced plans to purchase state development loans (SDLs) through open market operations (OMOs). On Tuesday, 13 states raised a total of 19,250 crore through the auction.

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

There has been a near-sustained increase in the cost of market borrowings so far this fiscal year. Among the top five borrowing states, the weighted average cost so far in October was 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 two Union territories have cumulatively raised 3.95 trillion via market borrowings compared to 2.59 trillion in the year ago. They are expected to raise another 2 trillion in the December quarter.

Barring Arunachal Pradesh, Jharkhand, Himachal Pradesh, Punjab, Manipur, Uttar Pradesh, and Tripura, the borrowing costs of all the other states saw a notable increase from the year-ago. Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka, and Rajasthan, accounted for 52% of the total borrowings by state governments so far in 2020-21.

On Friday, RBI had included the purchase of state development bonds through OMOs. While OMOs in central government securities are routine, it was a first for state government bonds.

“To impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct 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," RBI governor Shaktikanta Das had said.

The central bank’s decision to conduct OMOs for state bonds comes against the backdrop of the tussle over goods and services tax (GST) compensation between the central and state governments.

As many as 21 states ruled by the Bhartiya Janata Party (BJP) or its alliance partners have agreed to borrow from the market, while 10 states governed by parties not part of the National Democratic Alliance insist that the federal government should borrow and compensate them.

When the indirect tax regime was rolled out in 2017, the federal government was mandated to compensate states for the first five years until 2022 for revenue shortfall of below 14% a year.

States are now staring at a tax shortfall of about 3 trillion in FY21 as a result of the coronavirus crisis, but are expected to receive only around 65,000 crore from the federal government.

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