In an unusual scenario, state governments’ fundraising has sharply declined in the second half of the financial year. Bond market players attribute this to robust tax and goods and services tax (GST) collections, along with strong fiscal growth in the states.
As a result, there has been a lower supply of bonds from the states.
As a result, the spread between state government securities and government bonds narrowed to 20 basis points for short-term securities, from earlier, 30-35 bps. While the gap between the 10-year state government bond and the 10-year government bond fell to 23 bps from 37 bps. Usually, in the second half of the financial year, states borrow higher than the borrowing amount given in the indicative calendar. From April to September, states raised `3.7 lakh crore.
In October, states raised `84,842 crore against `1,12,037 crore as per the October-December indicative calendar. Additionally, in November so far, the borrowings by states have remained tepid. In the first two weeks of the current month, states borrowed just `14,867 crore against `33,680 crore as per the indicative calendar.
In earlier years, the borrowing overshoot the indicative calendar. In October 2023, states borrowed `92,283 crore, higher than `74,842 crore as per the indicative calendar, while in November 2023, states borrowed `38,250 crore, higher than `25,100 crore. Similarly, In October 2022, states’ borrowings were almost at par with figures given in the indicative calendar.
Owing to robust GST collections for the past few months, states have been sitting on huge cash balances, hence the need to aggressively borrow from the market did not arise, said market participants. Furthermore, in previous months, some states had assembly elections, which brought a model code of conduct into enforcement, barring states from splurge.
“States have accumulated money as GST collections have remained good, once they start spending this money then the requirement to issue more will be there,” a dealer with a private bank said.
As overall demand and supply dynamics remained favourable, market participants have seen bidding aggressively for state government bonds. Demand from foreign investors for government bonds has risen since the inclusion of them into global indices. Which has trickled down to state government bonds. Owing to stiff competition from foreign investors or foreign banks in the central government bond market, domestic players have been buying state-government bonds. Moreover, cash generated by state-owned banks, and local private banks by selling gilts, is often being used to invest in state government bonds, dealers said.
Also, with only a slight increase in long-term securities in the H2 calendar of government’s market borrowings, state government securities have become a more lucrative option for insurance companies and pension funds as a greater number of states issue long-term securities.
The higher premium on state government securities as compared to central government securities also remained a draw for banks, said dealers. States’ borrowings are likely to pick up in February and March when the central government’s bond issuances will go on a halt.
