Just SLR status won’t sell state papers

On Tuesday, a government paper crossed the 9 per cent yield for the first time. It was a 10 year West Bengal government paper, but the spread on the paper shows stress is building up on government finances. The Reserve Bank of India had placed twelve state government papers in this round of auction for a sum of Rs 9,140 crore but with a Green shoe option by Karnataka and West Bengal. The amount accepted was Rs 9,796.33 crore.

State government papers enjoy an almost co-equal rank with Central government papers. They both enjoy SLR status, which makes banks very keen to pick them up. Since the risk of default is practically nil, the spread on the state papers never exceeds

35 to 40 basis points from the ten year GOI paper. This time the cut-off on West Bengal is a full 75 points away from the benchmark GOI paper.

But other states too are getting close. In Tuesday's state government auctions, other than West Bengal, the cut-off price (the worst acceptable bid) was 8.9 and above for all states that sold ten year papers. Maharashtra had the best cut-off at 8.9 and Andhra Pradesh 8.91, but Bihar was at 8.97. Just ten days ago a similar Bihar paper was priced at 8.89, there has been a sharp fall in a very short time. The higher the spread the higher is the interest burden for a state government. As a fiscally better managed state Karnataka has moved away to raise papers with shorter duration which means a better price from the investors. But while its five year paper enjoyed a 8.68 cut-off at the last auction, things have worsened since. On Tuesday the market punished it with 8.77 per cent that too on a paper with a lower tenor of four years.

Despite the interest among the banks and insurance companies to chase these papers the divergence in spread is now beginning to stand out. These are somewhat like the Euro bonds.

The parentage is deciding the pricing of the paper though all are sovereign and are traded in the same currency. Just compare the pricing difference between a German Euro bond and a Greek one, to figure out how it goes. As more Indian states enter the bond markets, how efficiently they manage their state finances will determine the cost of raising funds instead of crutches like an SLR tag.

Subhomoy is a Deputy Editor based in New Delhi.

subhomoy.bhattacharjee@expressindia.com

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