Borrowing Costs for Indian States Ease After RBI Measures

Borrowing costs for Indian states fell sharply after the central bank said on Friday it will buy their debt via open market operations to help facilitate increased borrowing requirements.

The 10-year yield for state debt eased to 6.6%-6.69% at Tuesday‘s sale from 6.84%-6.93% range in last week’s auction, the Reserve Bank of India said in a statement. States sold 192.5 billion rupees ($2.6 billion) of bonds, exceeding a target of 177.5 billion rupees, it said.

In a bid to ease the market burden from heavy government debt sales, the RBI announced a series of measures last week including the purchase of state bonds this financial year. The move would improve secondary market liquidity and help compress spreads over sovereign bonds of similar tenors, Governor Shaktikanta Das said.

Average yields on Indian state bonds have already dropped 16 basis points in the last two sessions to 6.57% Monday, according to Clearing Corporation of India‘s index data. That’s after the spread of 10-year state debt over similar sovereign notes widened to a four-month high of 88 basis points last week, according to Care Ratings Ltd.

“The drop in borrowing costs was in line with secondary market yields for states,” said Pankaj Pathak, fixed income fund manager at Quantum Asset management Ltd. “For spreads to compress more, we have to see how much of the additional state supply RBI buys and how it structures it.”

The states have been quibbling with the federal government over who should plug the shortfall from goods and services tax collection, with the latest discussion failing to reach a decision, the Finance Minister Nirmala Sitharaman said Monday.

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(Updates with fund manager comment in fifth paragraph)

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