Heavy debt supply to further push up cost of borrowing for Ind

MUMBAI (Reuters) – Heavier-than-expected supply of debt from Indian states has resulted in a jump in the premium they pay over the corresponding central government bonds, and this is set to rise further as the overall supply is on track to hit a record high in fiscal 2025.

Indian states raised 505 billion rupees ($5.80 billion)through the sale of bonds on Tuesday. The quantum was the highest for this financial year, with yields on the 10-year bonds in 7.21%-7.34% range.

The cutoff yields rose to their highest level in over seven months. The 10-year benchmark bond yield was around 6.73%, leading to a spread with state debt 48-61 basis points, highest level in 13 months.

State governments generally pay a premium above central government bonds yields as they are quasi-sovereign in nature.

State governments are responsible for a considerable share of total government spending, which has led to an increase in borrowing over the last few years.

Heavy state borrowing would also increase the country’s overall debt-to-GDP (gross domestic product) ratio, though the federal government is adhering to fiscal prudence with lower targets for fiscal deficit and borrowing.

Long-term investors such as insurance companies, provident funds and pension funds are major investors for state debt, and due to heavy supply from states, their demand for 30- and 50-year central government bonds has eased.

New Delhi has been targeting a bulk of their borrowing through such ultra-long bonds.

“States are likely to borrow despite the comfortable cash position given inclination to fully utilize borrowing limits, but funding can be correspondingly lower at start of next fiscal,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.

“At the same time as state debt supply has picked up, there could be some concerns on the demand side that may be weighing on sentiment.”

Market participants anticipate the spreads to widen further as more supply from states in anticipated. They are scheduled to sell debt worth an additional 1.35 trillion rupees in the last three weeks of March, with traders anticipating the actual supply to outpace the calendar.

($1 = 87.1090 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)