States, Centre trying to avoid colliding in bond market, sources say

States, Centre trying to avoid colliding in bond market, sources say

Informist, Thursday, May 5, 2022

By Sagar Sen and Pratigya Vajpayee

NEW DELHI – State governments have surprised the bond market this year by borrowing only a fraction of the amount they had indicated in their calendar, and it is only partly because of their comfortable finances. After all, hefty cash balances, by themselves, have seldom deterred state governments from tapping the market as scheduled.

Senior officials from the finance ministry said that this time around, the Centre and state governments have an understanding to not flood the market with their bond issuances at the same time. Instead, state governments are likely to utilise their cash pile to backload their borrowings to the second half of 2022-23 (Apr-Mar).

"States have broadly agreed to refrain from borrowing by issuances of bonds in the first half of the fiscal. It really does not make sense for them to raise additional funds when they are already sitting on cash," the senior finance ministry official told Informist.

So far this year, state governments have borrowed just 123.90 bln rupees as against 470.3 bln rupees indicated by their borrowing calendar. For Apr-Jun, states are scheduled to raise 1.8 trln rupees through bond issuances.

Meanwhile, the Centre frontloaded its borrowing programme, scheduling 8.45 trln rupees worth of bond issuances in Apr-Sep, out of the total 14.31 trln rupees that it is scheduled to raise this year.

The unprecedented steepness of the bond yield curve has also had a part to play in states’ debt management strategy. Given that states park their surplus cash in treasury bills, borrowing excessively has become a particularly loss-making proposition for them, when state bonds have been priced 300-350 basis over the rate offered by the 91-day paper.

"Another factor that has played a major role is the surge in bond yields since February. There is no incentive for states to borrow at high cost when they actually don't need to," the official quoted above said.

The amount outstanding on 14-day T-bills, where states deploy bulk of their surplus funds, stood at 1.84 trln rupees as on Apr 29, declining over 1 trln rupees from a month ago.

The provision to carry forward the reform-linked part of the borrowing limits to the next year is also helping the states, sources said.

The Centre allowed states governments to carry forward the reform-linked part of the borrowing limit to the next year to reduce bunching up of borrowing by the Centre and states. As part of the stimulus package to mitigate the economic fallout of the COVID-19 pandemic, the Centre had in May 2020 increased the market borrowing limit of states to 5.0% of gross state domestic product from 3.0% for 2020-21, subject to states undertaking certain reforms.

The Centre's tax devolution to states in 2021-22, which was 1.38 trln rupees more than the revised estimate of 7.45 trln rupees, is also providing state governments some cushion.  End

Edited by Akul Nishant Akhoury

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