Dr Isaac’s strategy worked this time; loans raised at lower rates

While 7-yr SDL priced at 6.65pc, 3-yr was struck at 5.09 pc

THIRUVANANTHAPURAM: This time, Kerala’s astute finance minister, Dr Thomas Isaac, was more circumspect about the pricing of the loan rather than the volume or tenure of the loan unlike last month, when he raised Rs5930 crore by selling state development bonds (SDLs) at exorbitantly high rate of 8.96 per cent demanded by the lenders for the Rs2000 crore,15-year bond at the April 7 auction.

While Kerala raised Rs1930 crore through the 15 year paper (short of Rs70 crore actually planned), Rs4000 crore was raised through the other two SDLs on April 7.

Dr Isaac had earlier announced that he would frontload this financial year’s borrowings and seek to finish off half of his 9-month-period loan entitlements, at about Rs13,500 crore, during the first month itself.

Nevertheless, the FM was reminding us of the proverbial ‘twice shy’’ while taking part in the May 5 auction, where Kerala remained on the side-lines, putting two modest-sized Rs500 crore bonds on the block to raise Rs1000 crore in total against Rs6000 crore a month earlier.

But following his bitter experience at the April 7 auction, Dr Isaac had made it clear in advance that he would not go for larger amount or longer term for the May 5 auction.

This time (May 5), while the state could attract investors for his Rs500 crore, Kerala 2027 (7year) SDL at 6.65 per cent, the Rs500 crore three-year bond (Kerala 2023) had takers at rates as low as 5.09 per cent.

It’s worth remembering that for the April 7 auction, Kerala auctioned three bonds of 10 years, 12 years and 15 years tenures respectively, each targeting Rs2000 crore, at coupon rates of 7.91 per cent, 8.1 per cent and 8.96 per cent respectively.

According to market experts, it was not the size or tenure of the bond alone that has pushed up the price in the market last month, but more relevantly, it could be the market sentiments at that time – more recent to the start of COVID 19 onslaught sending the investors, especially banks, risk averse.

The rate at which Rajasthan and Tamil Nadu raised loans this time could very well substantiate that argument. While Rajasthan raised Rs1500 crore with a tenure of 10 years at 6.69 per cent, TN raised Rs1000 crore of 10-year maturity at 6.6 per cent.

“Today (Tuesday), the SDL yield premium to 10-year G Sec is in the band of 60-70 basis points (bps), whereas the premium to G-Sec on April 7 was at about 150 basis points (bps),” an analyst pointed out. (G-Sec is the similar bonds issued by Central government to raise funds.)


Bigger worry in store?

Kerala’s is entitled to borrow only another about Rs6500 crore until November as per the arrangement made with the Central Government and RBI for 2020–21.

The state is likely to find it hard to raise funds to pay salary and pension in the forthcoming months unless the Centre relaxes the borrowing limit, which is currently at 3 per cent of the GDP.

Given the anticipated slump in the current year earnings for most states and hence in the GDP, even the three per cent limit allowed would jump the red line and could end up logging the five per cent limit certain states are demanding from the Centre.


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