India's state borrowing costs spike to over six-year high as demand fades

MUMBAI: Borrowing costs for the most liquid part of India’s state government bond curve breached the 8% handle for the first time in over six years on Tuesday, according to traders, tracking a sharp spike in central government yields and weakening investor appetite.

Indian states raised over 300 billion rupees ($3.15 billion) through a sale of bonds, of which 9- to 10-year state bonds were sold in the 8.03%-8.10% range.

This is the first time since April 2020 that yields on state government bonds with a 10-year maturity have broken 8%.

Yields on other ultra-long papers were between 8.14% and 8.21%.

“The rise in state debt yields reflects a combination of elevated crude oil prices, tighter liquidity conditions, and open market sales,” said Harsimran Sahni, associate director and head of treasury at Anand Rathi Global Finance.

Last week, states raised funds through 9- to 10-year bonds in the 7.91%-7.93% band.

The benchmark 10-year 6.94% 2036 bond yield was at 7.36% on Tuesday, up from 7.19% last week.

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The yield spread of 10-year state bonds over central government bonds has compressed from around 75 basis points to about 65 bps in the last two months, and “we expect it to remain in the 55-70 bps range in the near term,” Sahni added.

Indian states aim to raise over 3.6 trillion rupees through bonds this quarter, after raising 5 trillion rupees in the first half of the fiscal.