In the debt market, states like Kerala and Karnataka have borrowed at a hefty 8 to 9 percent interest rate. This spike in cost has come on the back of reports suggesting that these states may borrow 50 percent of their loans in April itself. Reserve Bank of India has given states a late reprieve and allowed them more overdraft facilities. CNBC-TV18 Executive Editor Latha Venkatesh decodes why state governments are struggling to raise funds via bond issues.

States are sub-sovereign and if they are raising money at 9 percent, corporates will raise money at even more expensive levels. So the hope that Reserve Bank of India gave us a 1 percentage point rate cut is going to come to nothing. Hence, this remains is a cause of concern.

Kerala wanted to borrow money for a 15-year period and it was charged a punishing 8.96 percent. Karnataka got a 10-year paper at 8 percent, Maharashtra, a rich state was forced to shell out at 7.8 percent and these are the states where the COVID-19 response has to be big.

Overall, 19 states are borrowing Rs 37,500 crore. One of the reasons why perhaps investors did not go and buy their bonds is because there was a newspaper report suggesting that the government has given permission to states to borrow 50 percent of their full year borrowing in April itself. There is also talk among dealers that LIC probably did not come and buy as it normally does, because they collected lower premiums in the last quarter.

RBI did give some reprieve that states can remain in overdraft with it for longer 21 days. Earlier they could consecutively remain in overdraft only for 14-days. In a quarter they can be in overdraft for as long as 50 days. That reprieve was given so that states do not come and borrow, they just remain in overdraft with the RBI.

The 10-year bond ended at 6.4 percent, which is higher than what it was before the rate cut from the RBI came in last week. So a big damage has been done and this is not good news for corporates or for the government of India.

First Published:Apr 7, 2020 10:52 PM IST