In a significant development, 17 states have come together to raise a whopping Rs 50,200 crore in debt from the market, marking the largest weekly auction in the nation’s financial history. This impressive figure stands at a remarkable 81% higher than the initial Rs 27,500 crore indicated in the auction calendar for this Tuesday.
The substantial surge in borrowing activity has led to an uptick in the weighted average cut-off, climbing by 7 basis points (bps) to 7.45% from the previous week’s 7.38%. This surge in debt issuance comes amidst the backdrop of states grappling with financial constraints, exacerbated by the imminent closure of the fiscal year.
Following a peak of 7.89% in the first weekly auction of January, interest rates began a gradual descent from January onwards, particularly after the Centre disbursed states’ dues from tax devolution in early February. With the fiscal year’s end approaching, cash-strapped states are increasingly resorting to market borrowing to fulfill their financial requirements and sustain government spending.
Despite a slight decrease in the weighted average tenor of state debt, from 16 years to 15 years, the record-high supply observed in today’s auction underscores the pressing need for states to secure funds, especially during the busy March quarter.
As a result of this heightened activity, the spread between the cut-off of the 10-year state bonds and the benchmark 10-year G-sec (7.18 GS 2033) yield has also experienced a mild uptick, rising to 36 bps from 35 bps last week, according to Icra Ratings chief economist Aditi Nayar.
This surge in market borrowing reflects the evolving economic landscape and the growing reliance of states on external funding sources to meet their fiscal obligations and sustain economic activities. So far this fiscal year, states have raised a substantial Rs 9.28 lakh crore, representing a significant 29.4% increase compared to the same period last fiscal year. This underscores the ongoing challenges faced by states and the imperative for robust financial management amidst evolving economic conditions.