Yields on state development loans (SDLs), sovereign bonds issued by the state government to raise money from the markets, have fallen close to 150 basis points in the last three months. In April, states were paying as high as 8 per cent for a 10-year loan, now the same has dropped to 6.5-6.55 per cent, thanks to various liquidity measures taken by the Reserve Bank of India.
This is a big relief to state governments, which might need to substantially increase their borrowings this year as they foresee a severe fall in the revenue on the back of disruption in economic activities due to coronavirus pandemic.
When states approached the market in the first half of April, they could raise funds at as high as 8 per cent rate for a tenure of 10-year. During the same period, the government could raise funds at around 6.5 per cent, almost 150-basis points lower than what the states were paying on the funds raised by them. Kerala raised Rs 1,930 crore for 15 years at 8.96 per cent, Rs 2,000 crore for 12 years at 8.10 per cent and another Rs 2,000 crore for 10 years at 7.9 per cent in early April. Jammu & Kashmir raised Rs 800 crore at 8.15 per cent for a 10-year loan, Haryana raised Rs 5,000 crore at 8 per cent for 10 years.
However, yields began to cool down after the RBI in April announced various liquidity measures including a higher Ways & Means limit for states.
On June 30, a few states borrowed around Rs 12,000 crore for different tenure at rates ranging from 4.63-6.68 per cent. Gujarat raised Rs 2,000 crore for 10 years at 6.54 per cent, West Bengal raised Rs 2,000 crore at 6.55 per cent. Lower tenure loans are available at lower rates. For example, Tamil Nadu raised Rs 1,250 crore for three years at 4.63 per cent, and another Rs 1,250 crore for 35 years at 6.68 per cent.
According to a report from ICRA, various liquidity boosting measures announced by the RBI in April 2020 (Targeted Long-Term Operations 2.0, refinancing facilities for financial institutions, fixed rate reverse repos, increase in WMA limit for states etc) led to an easing in the 10-year G-sec yield to 6.21 per cent and the 10-year SDL cut-off to 7.0-7.15 per cent on April 21, cooling the spreads between the two to 79-93 bps. Subsequently, in the last weekly auction of April, the spread eased further to around 72 bps, reflecting the closing 10-year G-sec yield of 6.14 per cent and corresponding maturity SDL cut-off at 6.86 per cent.
At present, government bonds of 10-year tenure are available at 5.8 per cent yield, almost 70-80 basis points cheaper than state government bonds.
When asked if yields on SDLs are attractive enough to invest, Lakshmi Iyer, chief investment officer, debt and head of products at Kotak Mutual Fund, said, that she won't be investing in SDLs yet as few PSU bonds are available at higher levels, and due to higher supply of SDLs, spread won't compress in a hurry. So, she would prefer PSU bonds and/or longer tenure G-sec preferred at the current juncture over SDLS. She says she will wait for the spreads to widen, before they may look to switch.
Meanwhile, all states together raised Rs 1.7 lakh crore in the first quarter of 2020-21 against Rs 80,000 crore in 2019-20.
According to the rating agency ICRA, this sharp rise in borrowings reflects the shock to the revenues of the state governments given the decline in the consumption of several non-essential goods and services that is expected to have taken place during the lockdown period.
The Central government has increased the borrowing limits of states from 3 per cent to 5 per cent of the Gross State Domestic Product (GSDP) on fulfillment of certain conditions.