Cost of borrowing for states continues to decline as WMA draw-down spikes again

The cost of borrowing for states continues to decline, with the latest auction held on September 21, 2021 witnessing a 7 basis points fall in weighted average pricing of their debt to a three-week low of 6.80 per cent, as the draw-down from the ways and means advances (WMA) began to jump again. According to Icra Rating and Care Ratings, the weighted average cut-off of state development loans declined by 7 bps to 6.80 per cent, led by a 9 bps decline in the same to 6.78 per cent from 6.87 per cent last week for the 10-year instrument, with easing across tenors.

This has the spread between the 10-year state debt and the G-sec easing to 65 bps on September 21 from 70 bps last week, the lowest since the first week of April. A basis point is 100th of a per cent. At the auctions held on September 21, eight states raised Rs 8,910 crore and all of them accepted the notified amount. The market borrowings by the states so far in FY22 stood at 11 per cent less than that in the comparable period of FY21, as 25 states and Delhi have cumulatively raised Rs 2.92 lakh crore so far against Rs 3.27 lakh crore a year ago by 27 states and two Union territories. At this level, the borrowings so far are 12 per cent lower than the borrowings as per the indicative auction calendar for this period.

The debt raising is slow this year as many states are meeting their revenue shortfalls by tapping the financial accommodation being provided by the RBI by way of short-term borrowing through SDF (special drawing facility) and WMA (ways and means advances) instead of the debt market.