State development loans face weak demand for seventh straight auction: ICICI Bank

New Delhi [India], August 19 : State Development Loans (SDLs) continued to see subdued investor appetite for the seventh consecutive week, while central government securities (G-secs) witnessed better demand, especially for the newly introduced 30-year tenor, according to a report by ICICI Bank.

In the latest SDL auction held last week, six states, Bihar, Goa, Haryana, Jammu and Kashmir, Maharashtra, and Telangana, raised Rs 85 billion, in line with the notified amount.

It stated "State Development Loans: Weak demand for the seventh consecutive auction".

However, the demand remained muted. The bid-to-cover ratio, which measures investor interest, edged slightly lower to 2.71 compared with 2.75 in the previous auction.

Overall, the report stated that the cut-off yield for the entire auction rose sharply by 18 basis points to 7.26 per cent. This reflects sustained investor caution, as SDL auctions have now shown tepid demand for seven consecutive weeks.

So far in the financial year, states have raised Rs 3,328 billion through SDLs, marking a 31% increase on a year-on-year basis.

For this week, nine states are scheduled to raise Rs 176 billion, which is slightly lower than the auction calendar amount of Rs 185 billion. Meanwhile, the SDL spread over G-secs edged up by about one basis point to 45 basis points, highlighting the weak demand scenario.

In contrast, the central government's borrowing programme witnessed healthier demand in the latest G-sec auction conducted on Thursday. The Centre raised INR 250 billion, in line with the notified amount, with issuance spread across the 5-year and a newly launched 30-year tenor.

The auction drew a bid-to-cover ratio of 2.91, which was higher than the long-term average of 2.8. Demand trends, however, were mixed across maturities. The cut-off price for the 5-year tenor was marginally lower than market expectations, pointing towards weak appetite. Most of the bids came from domestic banks and mutual funds.

On the other hand, the 30-year tenor saw strong participation. The cut-off yield was below market estimates, indicating robust demand. Insurance firms and pension funds emerged as the key buyers for the longer tenor bonds.

Looking ahead, the report outlined that the Centre is expected to raise Rs 360 billion in the upcoming G-sec auction this week.

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