Drop in States' borrowing cost

Mumbai: After spiking to a record 7.02 per cent last week, the borrowing cost for the States has declined sharply to 6.81 per cent at the weekly auctions held on Tuesday, mainly because they raised shorter tenor funds and 37 per cent less than notified.

Last week, the cost of debt for three states had peaked to the highest this fiscal at 7.02 per cent, up 12 bps over the previous week, despite most of the notified states drawing down less or not participating in the auctions.

According to rating agencies Icra and Care Ratings, the reason for the lower cut-off at 6.81 per cent was driven by the cut in the Central excise duty and VAT by some states on petrol and diesel, but left the spread between the 10-year G-secs and state debt widened to 64 bps from 61 bps last week, as the duty cut will cushion the inflation.

The Rs17,000 crore GST compensation was another reason for the lesser appetite for funds this week. Also the share of the 10-year state bonds in total issuance in Q3 declined to 44 per cent from 52 per cent in Q2, leading to the massive decline in the cut-off.