State favours bonds with smaller size, shorter tenure
THIRUVANANTHAPURAM: Kerala has borrowed Rs1000 crore on Tuesday (August 25) in two tranches of state development loans (SDLs) at Rs500 crore each, at five-year and four-year tenures, priced at 6.04 per cent and 5.05 per cent respectively, according to an RBI statement.
This will take the total market borrowings during the fiscal year through the SDL auction route to Rs13,930 crore, way behind Rs45,000 crore, which is the state’s eligibility to borrow during 2020-21.
In fact, the original borrowing limit set at Rs27,000 crore earlier this fiscal was revised upwards to Rs45,000 crore by Central Government through a hike in the borrowing limit for the states from three per cent of their respective GDP to five per cent, in the wake of the COVID 19-induced financial stress the country is beset with.
Kerala’s financial position has been under pressure even since the pre-COVID period. The finance minister Dr Thomas Isaac had said about ten days ago that the State needed funds in the region of Rs6000 crore in order to pay bonus, special festival allowance, two months’ welfare pension over and above the routine salary and pension, which obviously need to be paid before the month-end itself as the state’s most celebrated festival, Onam, falls on August 31.
Borrowing slowed down after Q1
Dr Isaac who is known for his propensity for borrowing seemed to have observed an extra restraint since the first SDL auction on April 7, when the state put three SDLs valued at Rs6000 crore on the block.
A close look at the SDL auction history during this fiscal also shows that though the state raised Rs12,430 crore through SDL auction during the first quarter, the borrowing since then was confined to just Rs1500 crore including the just concluded Tuesday’s.
The FM may be preserving funds for the proverbial rainy day. Or for a ‘monsoon’ in store for the state?
Another interesting aspect is the decline in coupon during the said period. While the state had to offer interest (coupon) as high as 8.96 per cent for the 15-year paper, 8.10 per cent for the 12-year and 7.9 per cent for the benchmark 10-year SDL during the first auction on April 7, the price has drastically declined since by about 130 basis points for the 10 year SDLs, in a matter of four months. Even the yield premium to the similar period G Sec has come down to about 50 to 60 basis points depending on the tenure.