The Kerala government has withdrawn its plan to borrow ₹1,500 crore through the Reserve Bank of India (RBI) after investors demanded an interest rate of 8.5 per cent, raising concerns over the cost of fresh debt.

The state had applied to the RBI on Tuesday to raise the amount to meet salary payments and other expenses next week. However, it decided against proceeding with the borrowing after investors sought a higher interest rate.

The government is now exploring alternative ways to raise funds to address the immediate financial requirement.

The development comes amid rising borrowing costs for states. Thirteen states had planned to raise a combined ₹23,300 crore through the debt market. However, they collectively accepted only ₹18,963 crore after the auction.

Several states scaled back or withdrew their borrowing plans amid high interest rates. Gujarat withdrew its entire ₹2,000 crore bond offering, while Jharkhand scrapped its ₹200-crore offering. Both cited unfavourable borrowing rates.

Sikkim reduced its borrowing target from ₹400 crore to ₹200 crore. Assam, which had planned to raise ₹1,000 crore, accepted only ₹606.73 crore, while Nagaland raised ₹256.61 crore against its target of ₹300 crore.

Tamil Nadu and Uttar Pradesh, however, accepted their entire planned borrowing amounts.

Kerala had offered bonds with a maturity period of 14 years. Accepting the 8.5 per cent rate could also have implications for the state's future borrowing, as it might have had to offer similarly high interest rates on subsequent bond issues.