The Centre raised 10-year money in the current fiscal at 12.25 per cent. This is the first-ever instance of an Indian state accessing the market on its own might. The states have traditionally been borrowing from the market through conventional floatation with pre-determined coupon rates.

At the auction -- supervised by Reserve Bank of India deputy governor YV Reddy -- the state received 10 bids for Rs 190 crore for a notified amount of Rs 60 crore. It allotted nine bids and made a partial allotment to one bidder. The weighted average of the loan was 12.39 per cent.

Punjab had not raised money in the last round when 15 states entered with a 10-year state government loan maturing in 2008 offering a coupon of 12.20 per cent. The loan received an oversubscription worth Rs 1,204.95 crore for a notified amount of Rs 1,612.06 crore. Punjab National Bank, Punjab & Sind Bank and the Punjab-based provident fund trusts have reportedly subscribed to the Punjab state issue.

The auction which was a fallout of a meeting of finance secretaries of state governments held by RBI on November 8, 1997, where states were offered a facility to raise 5-35 per cent of their market borrowing allocation in a flexible way regarding timing, maturity and rate of interest.

With Punjab setting the ball rolling, credit-worthiness of individual states will play a major role in determining the cost of borrowings. The southern state of Andhra Pradesh is expected to follow Punjab at raising money at market determined rates. The state raised Rs 150 crore through the state loan sale held on December 28.