States pick up Rs 32,560 crore from bond market, long-tenor yields shoot up

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Published: April 8, 2020 4:40:35 AM

The central bank also eased overdraft facilities for states and Union territories (UT) on Tuesday. The RBI increased the number of days for which a state/ UT can be in overdraft continuously to 21 working days from the existing stipulation of 14 working days.

The central bank also eased overdraft facilities for states and Union territories (UT) on Tuesday.

In what is believed to be one of the largest state development loan (SDL) auctions conducted in a single week, nineteen states have picked up a total of Rs 32,560 crore from the bond market on Tuesday against the notified amount of Rs 37,500 crore. Yields on 10-year SDLs have shot up by at least 50 basis points led by the huge supply. The benchmark yield also took a hit closing 11 basis points higher at 6.415% on Tuesday to hit over-two week highs.
In the previous auction conducted on March 30, 10-year SDL yields had ranged at 7.30-7.35%. However, on Tuesday, many states picked up 10-year money at yields ranging from 7.75% to 8.15%.

For example, Uttarakhand issued 10-year paper at 7.35% in the previous auction, while it shelled out 7.85% for a similar tenor paper on Tuesday. The effect wasn’t as profound on short-end yields. For example, Punjab had issued four-year paper at 6.74% during the previous auction. This time, the yield on its four-year paper increased by just two basis points. The state did shell out 30 basis points higher for its five-year paper.

The central bank also eased overdraft facilities for states and Union territories (UT) on Tuesday. The RBI increased the number of days for which a state/ UT can be in overdraft continuously to 21 working days from the existing stipulation of 14 working days. It also increased the number of days for which a state/ UT can be in overdraft in a quarter to 50 working days from the existing stipulation of 36 working days. The arrangement will come into force with immediate effect and will remain valid till September 30, the RBI said.

Siddharth Shah, head of treasury at STCI Primary Dealer, believes that the clear outcome of Tuesday’s SDL auction is that states are desperate for funds. “It is the desperation of funds that led many states to accept funds at such higher yields. The trading hours were also extended by half an hour on Tuesday due to the SDL auctions since there were lots of states and it takes time for the process to take place. Despite being a disappointing day for the markets, the positive takeaway is the fact that the RBI has increased the overdraft time for states. As a result, I believe we won’t see them showing such desperation to raise funds in the coming auctions,” Shah said.

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