India’s state borrowing costs breach 8% as bond demand fades

Indian states face their highest borrowing costs in more than six years as weak demand, tighter liquidity and heavy bond supply drive yields higher.

India’s state-level borrowing costs climbed above 8% for the first time in more than six years on Tuesday, as a weaker appetite for debt coincided with a sell-off in central government securities, according to Business Recorder. States sold more than 300 billion rupees, or about $3.15 billion, in bonds, with nine- to 10-year paper clearing in the 8.03%-8.10% range.

The move marked the first time since April 2020 that 10-year state government bond yields had pushed through the 8% level. Longer-dated securities also came under pressure, with some ultra-long bonds priced between 8.14% and 8.21%, underscoring how quickly funding costs have moved higher for regional governments.

Market participants said the rise reflected a mix of expensive crude, tighter liquidity and open market bond sales by the Reserve Bank of India. TradingEconomics reported that India’s 10-year government bond yield eased slightly to around 7.37%-7.38% on Tuesday after touching multi-year highs, while buying from local lenders, including state-run banks, helped limit the decline. Even so, the benchmark had risen sharply in recent sessions after the central bank lifted its policy rate by 25 basis points and adopted a more cautious tightening stance.

The gap between 10-year state bonds and central government bonds has narrowed from about 75 basis points to roughly 65 basis points in the past two months, Business Recorder reported, and one trader said it could stay in a 55-70 basis point range in the near term. The borrowing pattern also points to heavy supply ahead: Indian states are seeking to raise more than 3.6 trillion rupees through bonds this quarter, after collecting 5 trillion rupees in the first half of the fiscal year.