Borrowing costs for states lowest since April

If G-Sec yields go down, SDL yields will follow,” said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

By Manish M. Suvarna

The weighted average borrowing cost on state development loans (SDL), across states and tenure has fallen this week to the lowest since early April 2021, primarily due to lower borrowing by the states in the current financial year than the indicative borrowing calendar and moderation in yields on government securities in the past few days.

In the current week, the average borrowing cost has been 6.62%, which is also 9 basis points lower than a week ago period. The weighted average yield of the 10-year SDLs was set at 6.89%, which is 3 basis points lower than a week ago period.

“There are expectations of lower borrowing requirements by many states due to significantly improved fiscal balances of states so far in FY22 and this is keeping borrowing cost lower. If G-Sec yields go down, SDL yields will follow,” said Pankaj Pathak, fund manager, fixed income at Quantum Asset Management.

Market participants said most states who are tapping the market to raise funds via SDLs were borrowing less due to improved balances on account of better-than-expected goods and services tax (GST) collections, higher collections of VAT on fuel items and devolution of taxes from the central government.

The yield on G-Sec has fallen due to a fall in US Treasury yields and the easing of oil prices in the international market. Currently, the yield on benchmark 6.10%-2031 bond yield is trading at 6.3657%.

Dealers with state-owned banks said that the appetite of investors in SDLs has improved as it is giving better returns and safety than corporate bonds this has led to tightening of spreads on SDL over related maturity of G-Sec. The spread between the 10 -year SDLs auctioned this week and the primary market yield of the 10- year G-Sec was 55 bps as against the spread of 61 bps at the start of the month.

Market players expect the spread to remain lower in the near term as yields on SDL are expected to hover at current levels. “The spreads may remain in a band of 45-60 bps, which was earlier used to be 75-90 bps,” Manglunia added.