Cash-starved and desperate, states borrow at steep rate in lockdown

For example, Kerala paid 8.96 per cent for a 15-year bond
State governments, desperately needing funds to fight a lockdown-induced slowdown, on Tuesday paid a steep price to borrow Rs 32,560 crore from the bond market, even as investors engaged in a negative bidding strategy to preserve their liquidity at a time when the markets are operating with curtailed timings.

In the face of heavy supply from both states and the Centre, and with foreign portfolio investors (FPIs) leaving the country, domestic investors demanded states to cough up spreads of 140-200 basis points (bps) over the equivalent government securities — and the states acquiesced. For example, Kerala paid 8.96 per cent for a 15-year bond. The equivalent maturity government security closed at 6.92 per cent. In normal times, spreads are not more than 60-70 bps over the equivalent maturity government securities.

According to the schedule, 19 states had lined up to borrow up to Rs 37,500 crore, but they managed to raise Rs 32,560 crore.

“There is absolutely no demand. So banks bid in such a way that almost guaranteed rejection. But the states accepted the bids,” said the head of treasury at a bank.


He cautioned that such practice could rather be the norm than exception, and the Centre too would have to pay steep coupons in the upcoming auctions unless the Reserve Bank of India (RBI) came up with direct support in the form of secondary market bond purchases through its open market operations (OMO).

“The state loans don’t get traded in the market, so the demand is less for them anyway. The market timings have also been curtailed, so it is difficult to gauge the demand. The market is expecting some support from the RBI,” said Devendra Dash, head of asset-liability management at AU Small Finance Bank.

The bond and currency markets closed at 2 pm on Tuesday, from its usual 5 pm. The markets will function between 10 am and 2 pm till April 17 due to Covid-19-related disruptions.

“With work from home becoming norm, a few people can initiate fresh positions from home. Also with new rules for moratorium on loans, banks will have to be mindful of liquidity position as previously budgeted inflows may not be happening,” said Harihar Krishnamurthy, head of treasury of First Rand Bank.

The states’ Rs 1.27 trillion borrowing plan for the quarter, along with the Centre’s Rs 19,000-21,000 crore weekly borrowing has not been supported by any OMO announcement by the RBI yet. The market was also hoping that the Centre would place a portion of the borrowing directly with the RBI, but that also did not happen. Instead, the government said it planned to borrow 63 per cent of its entire programme, or Rs 4.88 trillion, from the market in the first half of the fiscal.

For the most part of the day, the bond market remained busy dealing with state development loans (SDLs). But the G-sec regular bond trading was similar to how the markets operated last week.

The volume traded was Rs 17,420 crore, with the 10-year bond generating volume of Rs 2,730 crore. The 10-year bond yield closed at 6.42 per cent, up 10 bps from its previous close.

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