Why borrowings have now begun biting govts, Pg16

Key Highlights:

• In February 2026, Andhra Pradesh and Assam borrowed Rs 1,100 crore and Rs 1,000 crore respectively at 7.66% interest.
• This is higher than the 7.15-7.16% the states paid in February 2025 for similar securities.
• Gujarat also faced higher borrowing costs, paying 7.45% in January 2026 compared to 7.02% a year prior.
• Despite the RBI cutting the repo rate from 6.5% to 5.25% since February 2025, government borrowing costs have increased.

Detailed Insights:

• Rising debt levels have led to increased interest payments, consuming a large share of government budgets.
• The Centre's debt-GDP ratio increased from 51.7% in 2011-12 to 60.7% in 2020-21 due to the Covid-19 pandemic, and is currently at 55.2% in 2025-26.
• States' consolidated debt rose from 22.8% in 2011-12 to 31% in 2020-21, and has gradually declined to 29.2% in 2025-26.
• Excessive government borrowings can "crowd out" private borrowings, driving up rates in the money market.
• Reduced foreign capital inflows and RBI's actions to prevent rupee depreciation have tightened liquidity.
• The markets perceive the government's borrowing program as too large given the current liquidity situation.
• RBI's repo rate cuts have had limited transmission, with commercial banks lowering rates by less than the policy rate reduction.
• Revival of investment sentiment and return of foreign portfolio investors could ease liquidity concerns.

Key Concepts Involved:

• Repo Rate: The rate at which the RBI lends money to commercial banks against government securities.
• Debt-GDP Ratio: The ratio of a country's total debt to its Gross Domestic Product (GDP), indicating its ability to repay debts.
• Fiscal Responsibility and Budget Management (FRBM) Act: Indian law mandating the government to reduce its fiscal deficit.