State bond supply to surge as rural jobs’ costs escalate

Increased burden likely to drive up states’ borrowing costs, push yields higher

- Subhana Shaikh

An increased funding burden on the states under India's revamped rural jobs guarantee scheme is expected to push up their borrowings and send bond yields higher, according to market participants.

The Viksit Bharat-Guarantee for Rozgar and Ajeevika Mission (Gramin) (VB-GRAMG) Act shifts the Centre-state funding ratio to 60:40 from the current 90:10 under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

‘The higher funding responsibility on states would increase borrowing requirements, widen the spread or yield gap between state development loans (SDLs) and government bonds, and limit any near-term softening in sovereign bond yields, which have remained elevated for most of the year, according to at least five market participants who spoke with Mint.