State Development Loans: State borrowing cost jumps 10 bps

The borrowing cost of State Development Loans (SDLs), with a maturity of 10-years, rose sharply by 10 basis points in Tuesday’s auction because of a sharp rise in yields on government securities in the last few days. The rise was also witnessed because of a sharp surge in crude oil prices, reflecting the geopolitical tensions.

According to the Reserve Bank of India (RBI), the 10-year weighted average borrowing cost for states was at 7.25% on March 8, higher than 7.15% in the previous week. Accordingly, the spread between the weighted average cut-off of 10-year SDLs and G-Sec narrowed to 36 basis points from 39 basis points last week.

“Generally yields have been rising on the back of rising or elevated commodity prices especially crude oil prices as the war between Russia and Ukraine lingers on. The yield spread between SDL and central government securities has narrowed over the last one month but we do not expect the spreads to narrow further from the current level of 35 bps,” said Puneet Pal, head fixed income, PGIM India Mutual Fund.

In Tuesday’s auction, eight states raised Rs 16,890 crore, compared to Rs 15,290 offered in the auction. Gujarat, Haryana, and Puducherry together accepted an additional amount of Rs 1,600 crore. The 10-year SDL was issued by Gujarat, Haryana, and Tamil Nadu. The actual amount raised in nine out of 10 SDL auctions held so far in the fourth quarter of the current fiscal year was lower than the indicative amount. 

States raised Rs 1.7 lakh crore as against Rs 2.5 lakh crore indicated in January-March 2022, according to an Icra report.

The yield on government securities has increased sharply in the past few days after a sharp increase in crude oil prices in the international market, which stirred concerns about inflation that has already breached the central bank’s upper tolerance band. India imports maximum portion of its oil requirements from oil-producing countries and high crude prices not only increases concerns of inflation but also that of trade and current account deficit.  The yield on the new benchmark bond has risen more than seven basis points on geopolitical tensions, and the market is expecting it to rise further if the oil prices go up significantly.  Following this, the SDL yields on 10-year loans will also rise and may trade in the range of 7.20% to 7.40%.

“We expect 10-year SDL yields to trade in a range of 7.20% to 7.40% till the end of March 2022. Markets will remain volatile until some solution is found to the Ukraine – Russia conflict,” Pal added.