According to RBI officials, the central bank has formed a technical committee which has initiated discussions on the investment pattern of state governments. The objective is to boost state investments into SLR securities.

At present, bonds floated by public-sector undertakings and corporates offer 200 to 300 basis points higher yield than the SLR securities and, consequently, states do not find central government papers very attractive. However, going by the RBI guidelines, states are not allowed to invest in non-SLR securities.

Although the yields offered by government papers are lower than corporate papers, states are forced to subscribe to these papers as they are required to maintain a part of their investments in government securities for availing of special ways and meansadvances.

State governments also have an option of investing in treasury bills as non-competitive bidders or take part in primary auctions of government securities. However, they are subject to price-risk fluctuation owing to movement of gilts prices in the secondary market.

The RBI had earlier made a proposal to the central government to consider bonds floated by PSUs as SLR securities. However, no decision has yet been taken in this regard.

Industry sources pointed out that the premium which corporate bonds offer are off-set by the risk attached to them as against government-backed bonds. The government-backed securities will carry a risk weightage of 5 per cent from fiscal 2001. In contrast, the corporate bonds are assigned 100 per cent risk weightage.

Corporate papers are lapped up by buyers because of their attractive pricing. For instance, the one-year GE Capital paper which hit the market last month was priced at 11.70 per cent, 120 basis points higher than the yield offered by a comparablematurity government paper.

Reliance Industries recently issued a five-year paper at 13.5 per cent, 222 basis points higher than the coupon offered by 2004 central government paper (11.28 per cent). Infrastructure Leasing and Finance Company was in the market recently with a 10-year paper offering an annualised yield of 13.65 per cent. The 10-year government paper is available in the secondary market at a coupon of 11.81 per cent.