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Why banks, insurers are lining up to invest in strife-ridden J&K

The yield curve of Jammu and Kashmir is stabilising at a comfortable level despite lockdown and disruption of businesses.But the challenges to the state economy remains

twitter-logoAnand Adhikari | July 8, 2020 | Updated 19:27 IST
Why banks, insurers are lining up to invest in strife-ridden J&K

Any institutional investor like a bank or an insurance firm would think twice about investing in the state development loan (SDL) of a state like Jammu & Kashmir (J&K), which is faced with a double lockdown blows due to COVID-19 and the militancy, a continued insurgency situation and a tattered state economy. If indeed they do, they would demand a higher yield for the uncertainty and the risk associated with the investment.

But that is not the case on the ground. In the latest auction of SDL, J&K commanded a yield of 6.58 per cent for a 10-year paper. The state raised Rs 800 crore in the first week of July. It paid 6.62 per cent for a similar maturity paper of Rs 400 crore in the first week of June this year.

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According to bond dealers, this kind of a yield is not bad and comparable to what the other stable states like Goa, Rajasthan, Telangana and Tamil Nadu are paying for a 10-year paper. In fact, states like West Bengal and Madhya Pradesh had paid more at 6.65 per cent and 6.64 per cent, respectively in the June-end auctions. The surplus liquidity in the market and risk aversion of lenders are encouraging investment in SDLs, which are unlikely to default.

The J&K did face some rough weather in the bond market when the sudden announcement of the abrogation of special status hit the bond street in August last year.  The 10-year yield had jumped to 7.39 per cent. The state paid a yield of 7.39 per cent for a 10-year paper when it raised Rs 400 crore. The yields actually had shot up  from 7.28 per cent, which it paid in July 2019 for raising Rs 500 crore.

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That was the time when interest rates were also relatively higher than what they are today, but the other states were paying an average yield of 7.20 -7.24 per cent during that time. Therefore, the  premium demanded from J&K was 10 basis points to 20 basis points. This big difference in yields has bridged now.

There has been a gradual decline in the yields for the last one year. The yield curve of the state is stabilising at a comfortable level despite lockdown and disruption of businesses.

But the challenges to the state economy remains. Unlike other states, the J&K has been the most impacted because of the lockdown post the abrogation of its special status in August last year. The COVID-19 outbreak brought another jolt to its economy which is entirely dependent on tourism, farming, arts and crafts etc.

The state's gross fiscal deficit was the highest at 6.5 per cent for 2019-20 as per the budgeted figures. There are some who suggest the yield may spike later as there could be a flood of government papers in the second half of 2020-21. Post-COVID-19, the Centre as well as state governments will be raising additional borrowings, which will be difficult for the market to absorb at the current yields.

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