MUMBAI, Nov 14 (Reuters) - The spread between Indian state governments' bond yields and central government debt is expected to widen only in the last quarter of this fiscal year when states turn to the market to help fund their planned expenses, bankers and analysts said.
The spread between India's benchmark 7.26% 2032 bond yield and 10-year state bond yield has remained subdued over the past few months, hovering in a 30-40 basis points (bps) range.
"We could see spreads rise to 50 bps in January-March ... as supply from both (states and centre) would be higher," said Vijay Sharma, senior executive vice president at PNB Gilts.
Indian states have borrowed only 3.67 trillion Indian rupees ($45.43 billion) so far in this financial year, which is just about 70% of their planned borrowing.
"State government borrowing continues to undershoot the announced calendar largely due to lower expenditure and higher-than-anticipated tax collections," said Gautam Kaul senior fund manager, fixed income at IDFC AMC.
This lower supply has been one of the major reasons for the shrinking yield spread and also curbed any major spike in government bond yields, despite aggressive policy tightening.
However, this could now change, said Gaura Sen Gupta, an economist at IDFC First Bank.
"Gross state debt supply should pick up in the remainder of FY23 as states push expenditure growth and in particular capex. The majority of the capital expenditure tends to happen in the second half," said Sen Gupta.
She expects gross state debt supply to be around 7 trillion rupees this financial year.
New Delhi aims to borrow 4.32 trillion rupees from now to February. State debt issuance, however, goes on through March and has historically been heaviest in the last quarter.
Market participants further said that as states loosen their purse strings to push growth, the centre may look to curb spending to show fiscal prudence.
"Going forward, states may need to borrow more in line with their planned borrowings and at that time the picture may be clearer about demand-supply mismatch," said Neeraj Gambhir, group executive and head - treasury, markets and wholesale banking products at Axis Bank. ($1 = 80.7850 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
