Updated: February 3, 2021 5:09:36 pm
With the Centre and state governments set for a hike in borrowings as envisaged in the Budget, the borrowing cost for states at the auction of the state government securities or state development loans (SDLs) on Tuesday shot up by around 16 basis points to touch a 17-week high of 6.70 per cent.
On the other hand, yields on 10-year benchmark bonds, which rose 14 basis points on Monday, rose by another 7 basis points to 6.13 per cent amid worries over higher government borrowings. “The announcement of an expansionary budget entails large scale additional government borrowings, which will have an impact on the interest rates,” said Jyoti Prakash Gadia, managing director, Resurgent India.
The Monetary Policy Committee of the RBI is expected to keep the key policy rate — Repo rate — unchanged at 4 per cent at its meeting on February 5. “Given the higher-than-expected fiscal stimulus, we now expect the RBI MPC to be on hold in FY22 and hike rates by 100 bps in FY23,” said a Bank of America Research in a note.
According to market experts, the sharp increase in the borrowing cost at the RBI’s auction can be attributed to concerns over the likely increase in the state government borrowing in the coming financial year as per the announcement in the Union Budget. States are being permitted by the central government to have a net borrowing of up to 4 per cent of their GSDP in 2021-22 in line with the recommendations of the 15th Finance Commission. This is a one per cent increase from the permissible limit under the 14th Finance Commission, Care Ratings said in a report.
The government will borrow a gross Rs 12 lakh crore via bonds in the fiscal year beginning April, Finance Minister Nirmala Sitharaman said Monday. Over the coming year, high market borrowings, concerns over inflation and a move towards normalising liquidity conditions by the RBI could maintain pressure on yields. “That said, we do see the RBI continuing with its yield management tools (perhaps more of Operation twists compared to plain vanilla OMOs due to liquidity concerns) to keep borrowing costs under check,” said Abheek Barua, Chief Economist, HDFC Bank.
Care Ratings said the (weighted average) yields of the 10-year SDLs (across states) at the auction held today at 6.89 per cent was 26 bps higher than from week ago and the highest since early October 2020. As many as 13 states raised a total of Rs 20,377 crore at the auction of the state government securities or state development loans (SDLs) held on Tuesday. In the current fiscal year, 28 states and 2 UTs (Union Territories) have cumulatively raised a total of Rs 6.31 lakh crores via market borrowings, 35 per cent more than the borrowings in the corresponding period of 2019-20 (Rs 4.67 lakh crore). The states have so far raised 77 per cent of the scheduled market borrowings as per the indicative calendar for 2020-21. “The announcement of ARC and relaxation in SARFAESI Act will give leg rooms to the banks to have higher lending resources and liquidity which in turn will avoid crowding out effect of the Government borrowing and restrict rise in bond yields,” said Bal Krishna Piparaiya, Senior Director, Brickwork Ratings.
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