The Hindu Business Line : States seek floaters to prepay Central loans

All market borrowings that have so far been made by the States for settlement of Central Government loans as part of the debt swap arrangements were at fixed rates. However, state government officials said, "Using fixed rate borrowings for prepayment of Central loans is not favourable for restricting interest costs and we need floating rate issues."

The debt swap was intended for helping states to cut revenue deficits and thereby accelerate fiscal reforms. Such repayments also helped the Centre to cut its own fiscal deficits.

Till March this year, Rs 59,000 crore of state loans bearing 13 per cent interest and above have been swapped.

Bulk of the states' market borrowings for the debt swaps were conducted when rates dropped below 7 per cent. At the last auction of state loans on August 24, rates ranged between 7 and 7.25 per cent. States now fear that the subsequent round of borrowings would be at higher costs.

With ten-year yields hardening to about 6.5 per cent and remaining northbound, States now believe that the coupons on most of their market borrowings this year would be above 7 per cent.

Although these costs are substantially lower than the interest incurred on Central borrowings, state government officials said the rising interest costs would still impact their fiscal correction efforts and could completely jeopardise all their revenue expenditure estimates for the year. The officials said that they would prefer that their borrowings to be benchmarked closer to the Central Government securities such as the 364-day treasury bill. Even after allowing for higher spreads, these costs would still be sustainable for fiscal correction.

This year, no debt swap has been undertaken by the States so far. States want to defer the swaps till such time rates come down further. The target for debt swap this year was Rs 25,000 crore.