India’s sub-sovereign borrowing costs surge above 8%, highest since July 2022

MUMBAI: Borrowing cost for nearly half of Indian states, also known as sub-sovereigns, surged in Friday’s auction, reaching levels last hit almost four years ago.

Interest sought by investors have jumped due to persistently high supply of such debt, a broader increase in yields and regulations proposed by the insurance watchdog which require more capital to be set aside for investment in sub-sovereign debt.

Indian states raised around 400 billion Indian rupees ($4.22 billion) earlier in the day, of which 180 billion rupees, or 45% of the amount, was raised at cutoff yields ranging between 8.00% and 8.09%.

At the previous auction, yields ranged between 7.60% and 7.88% for longer duration papers.

“The recent rise in cut-offs for certain states above the 8% level appears to be driven by a combination of supply-side dynamics and evolving yield expectations. The current market conditions are reflected in the latest prints above 8%, but they do not yet point to a structural change,” said Harsimran Sahni, head of treasury, Anand Rathi Global Finance.

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Federal government bond yields have risen 28 basis points this month with a more than 50% spike in oil prices due to the ongoing Middle East war triggering inflation and fiscal concerns.

States have also borrowed a record 12.71 trillion Indian rupees in the current fiscal year, just 1.90 trillion rupees short of what the central government raised through debt sale.

Demand for Friday’s auction was weak, including from some insurance companies amid lack of clarity on the proposed norms, said traders.

India’s Insurance Regulatory and Development Authority of India (IRDAI) has stipulated that firms have to set aside more capital when they buy state debt based on a specific “risk factor”.

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The norms are not yet finalised but insurance companies warn this will make state bonds less attractive, and in turn will push their yields higher.