Spread between Indian state, central government bond yields to widen in FY24
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The spread between the yields of Indian state and central government bonds is likely to widen gradually in the new financial year, as state bond supply is expected to remain elevated, analysts said.
India's union government is set to borrow a record 15.43 trillion rupees ($187.75 billion) in the financial year starting April 1, according to market participants. States' borrowing will also be at a record, they added.
Citi expects states to borrow around 8.7 trillion rupees, and the crowding out is likely to prompt investors to demand higher returns for state bonds, traders said.
Others such as ICICI Securities Primary Dealership expect states to raise 8.1 trillion rupees through bonds.
GRAPHIC: Borrowing by Indian states https://www.reuters.com/graphics/INDIA-MARKETS/znvnblaojvl/chart.png
"The spread of state debt over government bonds will widen and could rise broadly to 60 to 70 basis points (bps) for the 10-year and above segment. But the movement may be gradual, playing out after the first quarter of the next fiscal," said Pankaj Pathak, fixed income fund manager at Quantum Asset Management.
Indian states sold 10-year bonds at a spread of over 40 bps earlier this week amid heavy supply, but the spread remained in the 30-35 bps range for most of the second half.
Even though states' borrowing rose in March, they undershot the budgeted announcement by a large margin for the full year, as the union government front-loaded the tax funds to be devolved to the states.
"The central government was very proactive in managing state finances this year, but there is a risk the centre's revenues may be lower next year. It is likely to be conservative in the front-loaded devolution," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
"So FY24's actual borrowing may not undershoot the budget by a very large margin."
Indian states raised 7.58 trillion rupees this year, after raising 7.02 trillion rupees in fiscal 2022 and 7.99 trillion rupees in fiscal 2021, a year marred by the coronavirus pandemic.
($1 = 82.1850 Indian rupees)
