States may not borrow as much as the record $41 billion they plan to in the January-March quarter, which will help keep the spread between State and central government bond yields in check, analysts said.
States plan to sell bonds worth ₹3.41 trillion, the highest quarterly borrowing ever scheduled, in the last three months of the financial year, according to a calendar of planned State borrowings the Reserve Bank of India released on Friday.
"The actual issuance is likely to be lower, based on historical pattern and States' fiscal performance," said Gaura Sen Gupta, India economist at IDFC First Bank.
States' cash balances with the central bank, a measure of the surplus they hold, remain on the higher side, reflecting the comfortable fiscal position of States, she added.
States borrowed ₹4.57 trillion in the first nine months of the financial year, less than their planned ₹6.55 trillion.
This has helped roughly halve the spread between the yields on the 10-year State and central government bonds to 30-35 basis points (bps) from about 60 bps towards the end of the financial year.
It also helped keep central government bond yields in check as long-term investors replaced purchases of State bonds with central government securities.
States have been raising 10-year funds in a broad coupon of 7.55%-7.65% in the last few weeks, during which the benchmark 10-year yield has traded in a 7.20%-7.35% band.
"States may end up borrowing around ₹2.50 trillion to ₹2.70 trillion," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
"States' fiscal condition is decent, revenue collections are strong, spending is not much, and capex has not picked up in a large manner, and there are still some funds that they will receive from the Centre. All these factors support another undershooting of borrowing calendar."
During the fiscal year, the Centre gave States funds through tax devolution, which has been front-loaded this year. States are also eligible for interest-free loans of up to ₹1 trillion.
States have taken approval for borrowing ₹770 billion from this pool of funds, rating agency ICRA said in a note on Monday.
"If there is an announcement in the upcoming Union Budget, regarding the carry-forward of the unutilised approved amount and/or continuation of the capex-loan scheme, some State governments may reassess their borrowing calendar," said Aditi Nayar, an economist with ICRA.