18 March 2024–On Tuesday, 17 states would sell bonds to borrow almost Rs 50,000 crore, the most ever by central or state governments in India’s bond market. Bond dealers and investment managers said the record-high amount is unlikely to affect market yields given how RBI and the federal government conducted gilt auctions this fiscal. A single-day gilt auction fetched Rs 39,000 crore on February 2 for the central government.
Seventeen state governments would borrow Rs 50,206 crore through auctions on Tuesday, March 19, RBI announced on Friday, March 15. At Rs 8,000 crore, UP is the highest borrower of the 17. Karnataka, Maharashtra, and Tamil Nadu follow at Rs 6,000 crore each.
After February 15, state governments borrowed more than the federal government because long-term domestic investor demand increased due to a surge in investable flows at the end of the fiscal. This is shown in the yield gap between state and central government bonds. From nearly 50 basis points (100 bps = 1 percentage point) on 10-year state bonds above 10-year gilts two months ago, it is now 35 bps even though state governments borrow more.
Conclusion
Differences could narrow. “Considering the softening interest rate outlook and history of much lower state borrowing during the first quarter of the fiscal year, the spread between state government bonds and gilts is expected to compress over the next quarter,” said Ram Kamal Samanta, senior VP—investment, Star Union Dai-ichi Life Insurance.
