The Reserve Bank (RBI) of India on Wednesday indicated a slew of measures that would help develop the liquidity of state development loans (SDLs), reduce the impact of SDL auctions on general market borrowing costs and bring the pricing on SDLs of different states in tandem with their risk metrics.
The central bank said that SDL auctions would be conducted on a weekly basis and the auction results would be announced latest by 3 pm on the same day. This comes as a relief for corporate debt issuers as huge supply of SDLs on a fortnightly basis often impacted yields.
Furthermore, consolidation of state government debt will also be undertaken to improve liquidity in SDLs through reissuances and buybacks, so as to even out redemption pressures and elongate residual maturity.
As Ajay Manglunia, EVP at Edelweiss Securities, points out, slotting SDL auctions every week will space out huge quantum borrowings at a fortnightly basis, that used to distort the market pricing.
“Reassurances and consolidation will also improve the depth and liquidity in that segment. With this, there will be lesser impact on the market borrowing costs for other corporates,” Manglunia points out.
The RBI also stated it will disclose high-frequency data relating to finances of state governments — available with it — on its website.
Foreign portfolio investors have kept away from SDLs due to a lack of transparency in the states’ finances, apart from liquidity concerns on these papers. According to depository data, FPIs have utilised only 14.67% of the permitted quota of Rs 28,500 crore in SDLs.
Interestingly, states with poor finances have been borrowing at rates that are very similar to the SDL yields of states showing fiscal prudence.
Despite the central bank’s statement that it will disclose available data on state finances, market players believe the spreads between different papers is unlikely to change considerably.
“This is because the pricing usually comforts investors with the fact that the central bank services the borrowing by actively handling the balances in its account. As a result, till the servicing mechanism changes, we may not see a great spread between yields of different SDLs,” Manglunia asserts.