States'' Borrowing Costs Rise Amid Mideast Conflict

Mumbai, Mar 27 (PTI) Borrowing costs for states rose by a sharp 0.15-“0.30 per cent at an auction on Friday to over 8 per cent in some securities, tracking a spike in government bond yields amid escalating conflict in the Middle East that has pushed up global oil prices.

Data compiled by PTI from the Reserve Bank of India (RBI) showed that the cut-off yield on long-term securities increased across maturities.

The yield on 15-year State Development Loans (SDLs) rose by as much as 0.24 per cent compared with the previous auction on March 24, while yields on 20-year SDLs increased 0.16 per cent and those on 25-year bonds climbed by 0.30 per cent.

"Long-term state bond yields have gone up by 0.15-0.30 per cent compared to the last auction, with several states borrowing at above 8 per cent, even touching around 8.09 per cent. We also saw some states taking less money than planned or even rejecting bids, which means investors are demanding higher returns before they are willing to lend," said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP.

In the SDL auction on Friday, 13 states borrowed Rs 39,991.958 crore, which was lower than the notified amount of Rs 42,941 crore. Gujarat and Assam did not accept any bids on their bond issue, which experts said was due to the higher cut-off yield demanded by the investors.


On the other hand, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal accepted partial amount on their securities, as per RBI data.

Since the onset of the Middle East crisis, Indian bond yields have remained under pressure amid rising inflationary concerns driven by a sharp increase in Brent crude oil prices.

Additional strain has emerged as the Indian rupee weakened to record lows following foreign investors pulling out funds from both equity and debt markets.

Over the past week, yields on government securities have hardened, with the 10-year benchmark bond yield rising by 0.10 percentage point to 6.93 per cent.

Srinivasan added that government bond yields are likely to move towards 7 per cent or above, and other borrowing costs will also increase. "At the same time, this creates an opportunity -- these higher yields mean investors can now earn better returns, but they need to be cautious and invest gradually as markets may remain volatile," he added.