Ukraine War Has States Paying Highest For Debt At 7.29%

The Ukraine war and resultant spike in prices of commodities have increased risk aversion of investors, leading to a steep 19 basis points (bps) increase in the cost of funds for the states, which shot up to the highest so far this fiscal to 7.29 per cent, according to a report.

The weighted average cut-off of the aggregate state development loans hardened by 19 bps to the current fiscal high of 7.29 per cent at Tuesday's auctions from 7.10 per cent last week. This also saw the weighted average tenor of state issuances increasing to 16 years from 13 years, Aditi Nayar, chief economist at ICRA Ratings, said.

The average cut-off or cost of borrowing shot up to 7.25 per cent for 10-year state development loans (SDLs), reflecting the sharp surge in crude oil prices after Russia invaded Ukraine, following which the 10-year G-secs yield rose by 12 bps to 6.89 per cent today. Accordingly, the spread between the two narrowed to 36 bps today from 39 bps last week, she said. 

Eight states raised Rs 16,900 crore through SDLs today, 39 per cent lower than the Rs 27,900 crore initially indicated for this week. As many as 12 of the 18 states, which had initially indicated they would borrow Rs 18,700 crore, did not participate in today's auction and two states borrowed Rs 600 crore less than indicated. But four states borrowed Rs 6,000 crore more than the indicated amount.

Overall, in nine of the 10 weekly SDL auctions held so far in Q4, the actual amount raised was lower than the indicated amount, aggregating to Rs 1.7 lakh crore against the Rs 2.5 lakh crore indicated for the quarter so far. The agency expects the Q4 auctions to be Rs 0.8-1 lakh crore lower than indicated.