Despite a rise in tenors, the weighted average cut-off of state government debt issuances eased by 13 basis points to 7.11 percent at Tuesday's auctions, thanks to dovish monetary policy and reduced demand.
State development loans (SDLs), as state government securities are known, were raised by seven states plus Delhi for Rs 12,100 crore, a staggering 38 percent lower than the indicated level for this week.
According to Icra Ratings, the spread between 10-year SDLs and G-secs narrowed to 40 basis points from 48 basis points last week.
Seven of the twelve states that had indicated a borrowing requirement of Rs 9,800 crore did not bid in Tuesday's auction. Tamil Nadu also borrowed Rs 1,000 crore less than expected.
Gujarat, Jammu and Kashmir, and Rajasthan, on the other hand, borrowed Rs 3,100 crore despite not having announced that they would participate in the auction at the outset. Assam took out a loan of Rs 400 crore more than it was supposed to.
Overall, the issue on Tuesday was about 33% lower than a year earlier, when it was Rs 17,900 crore.
Except for Odisha, 29 states have borrowed a total of Rs 5.86 lakh crore in FY22, roughly 12% less than the previous year's amount of Rs 6.67 lakh crore.
At Tuesday's auction, longer tenors raised Rs 8,600 crore or 71% of the entire issue; Rs 3,000 crore, or 25%, was raised in the 10-year bucket; and the remaining Rs 50 crore, or 4%, was raised in the 7-year bucket.
Tamil Nadu raised Rs 1,000 crore at an attractive 7.13 percent, compared to 7.12 percent for Karnataka and Punjab's 15-year issuances.
Despite the weighted average tenor extending to 15 years from 12 years, the weighted average cut-off of the aggregate issuance softened by 13 bps to 7.11 percent, down from 7.24 percent last Tuesday.
According to Aditi Nayar, chief economist at Icra, this is similar to the relaxation witnessed in the 10-year G-secs (6.54 percent, 2032) yield, which closed at 6.67 percent, 14 basis points lower than last Tuesday.
This softening, she claims, is due to a number of factors, including the unchanged reverse repo rate last week despite expectations of a raise, the overall dovish tone of monetary policy, and the postponement of the Rs 24,000 crore G-sec auction that was originally slated for February 18.