Indian states may not borrow as much as the record $41 billion they plan to borrow in the January-March quarter, which will help limit the spread between state and central government bond yields , analysts said.
States plan to sell bonds worth ₹3.41 trillion, the highest quarterly borrowing ever, in the last three months of the fiscal year, according to a schedule of planned state borrowings that the Reserve Bank of India released on Friday.
“Actual issuance is likely to be lower, based on the historical pattern and state fiscal performance,” said Gaura Sen Gupta, Indian economist at IDFC First Bank.
States’ cash balances with the central bank, a measure of the surplus they hold, remain on the rise, reflecting states’ comfortable fiscal positions, she added.
States borrowed ₹4.57 trillion in the first nine months of the financial year, less than their planned ₹6.55 trillion.
This helped reduce the spread between 10-year government and government bond yields by about half to 30-35 basis points (bps) from around 60 bps towards the end of the year.
It also helped keep government bond yields in check as long-term investors replaced government bond purchases with government securities.
States have raised 10-years in a wide coupon of 7.55% to 7.65% over the past few weeks, during which the benchmark 10-year yield traded in a band of 7.20 % to 7.35%.
“States could end up borrowing between ₹2.5 trillion and ₹2.7 trillion,” said Abhishek Upadhyay, Senior Economist at ICICI Securities Primary Dealership.
“The states’ fiscal position is decent, revenue is strong, spending is not large, and capital expenditure has not increased significantly, and there are still funds they will receive from the Center. All these factors support another borrowing schedule underestimate.”
During the year, the Center provided funds to the states through fiscal decentralization, which was anticipated this year. States are also eligible for interest-free loans of up to ₹1 trillion.
States have approved borrowing £770 billion from this pool of funds, ratings agency ICRA said in a note on Monday.
“If there is an announcement in the next Union budget to carry forward the unspent approved amount and/or continue the investment lending program, some state governments may reassess their borrowing schedule” , said Aditi Nayar, an economist at ICRA.
