By Manish M. Suvarna
The weighted average borrowing cost on government development loans (SDL), over states and term of office, dropped to its lowest level since early April 2021 this week, mainly due to lower government borrowing in the current financial year than the indicative borrowing calendar and moderation in government bond yields the last few days.
In the current week, the average borrowing cost was 6.62%, which is also 9 basis points lower than a week ago. 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 from states so far in FY22 and this keeps borrowing costs lower. If G-Sec yields fall, SDL yields will follow,” says fund manager Pankaj Pathak , fixed income at Quantum Asset Management.
Market participants said most states that use the market to raise funds through SDLs borrow less due to improved balances due to better-than-expected goods and services tax collections (GST), higher collections of VAT on fuel items and devolution of central government tax.
According to CARE Ratings, the loans so far by states in FY22 have been 13% lower than the indicative auction calendar for the period. The statements in FY22 have so far raised Rs 4.06 lakh crore compared to Rs 4.66 lakh crore proposed in the indicative lending calendar. Maharashtra, Tamil Nadu, West Bengal, Uttar Pradesh, Rajasthan and Telangana are the top loan states so far in FY22, accounting for 66% of total loans. However, Odisha has not yet taken advantage of this fiscal market loan.
Yields on G-Sec declined due to a decline in U.S. treasury yields and the easing of oil prices in the international market. Currently, the return on benchmark is trading 6.10% -2031 bond yield at 6.3657%.
Traders with state-owned banks said that the appetite of investors in SDLs has improved, as it provides better returns and security than corporate bonds, leading to tightening of spreads on SDLs over G-Sec related maturity. The spread between the 10-year SDLs auctioned this week and the primary market yield of the 10-year G-Sec was 55 bps compared to the 61 bp spread at the beginning of the month.
“We also see that a large number of investors have found SDL levels better and more attractive than corporate bonds, which has led to a better appetite for government loans from corporate and institutional players,” said Ajay Manglunia, managing director and head of institutional fixed income , JM. Financial.
Market players expect the spread to remain lower in the near term, as yields on SDL are expected to move to current levels. “The spreads can stay in a band of 45-60 bps, which was previously used to be 75-90 bps,” Manglunia added.