Opinion Semi Column: With states planning to borrow more, RBI mulls new pricing
Among the states, Kerala, Tamil Nadu, Rajasthan and Uttar Pradesh have already come to the market twice.
Three weeks into the new financial year, some of the states are already beginning to run into some cash crunch.
On Tuesday, Kerala along with 10 other states collectively raised Rs 8,916 crore from the market. States are supposed to tap markets to raise resources through state development loans. But the sum raised this time at Rs 13,801 crore was nearly double than what they did in April last year.
Among the states, Kerala, Tamil Nadu, Rajasthan and Uttar Pradesh have already come to the market twice. While Rajasthan has raised Rs 1,000 crore, the other three have raised Rs 2,000 crore each.
Kerala is among the three states including Punjab and West Bengal that has sought a moratorium on its loans from the Centre. But the worry line is that other states including cash-rich Tamil Nadu have also begun to borrow heavily.
Part of the reason for the large borrowing could be the need to insulate themselves till a new government is in power at the Centre. So, FY15 could be a year of flux for states that had collectively raised over Rs 2 lakh crore from the market last fiscal.
As states borrow more from the markets, the Reserve Bank of India is planning to move away from its uniform pricing system for state government bonds. The Bank is planning a gradual move to market-based valuations for such paper. At present, commercial banks value state debt at a fixed spread of a quarter-percentage point over government bonds.
States, in turn, may also need to reassess their market borrowing requirements later mid-year when the Centre presents the full Budget for FY15 and provide a clear picture on transfer of resources. More importantly, with a new government in place, states could get a larger role to play in developmental works, thereby getting more funds to implement programmes. For investors in state government paper, who are already jittery about the RBI’s pricing reform plans, this would be a whole new ball game as well.
Surabhi is a special correspondent based in New Delhi
surabhi.prasad@expressindia.com
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