RBI announces Rs 10k-crore OMO for state bonds

The Reserve Bank of India (RBI) on Friday announced the first auction of state development loans (SDLs) through the open market operation (OMO) route. The purchase auction will be held on October 22 and the size of the auctions could be enhanced in future, depending on the response to the first one, the central bank said.

There will be 30 different securities on sale from 15 states — Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Karnataka, Kerala, Madhya Pradesh and Maharashtra. The RBI has not specified the amount of securities on sale or the amount it plans to purchase from each state.

Market watchers said that the higher supply of SDLs had resulted in higher spreads, with current spread standing at around 80 basis points (bps), as against the previous year’s average of 45 bps. Anshu Kapoor, senior executive vice president, Edelweiss Financial Services, said, “States have borrowed Rs 3.5 lakh crore thus far, and will have to borrow at least another Rs 3.5-4 lakh crore this year. There is a pressing need for RBI to mop up a significant portion of this.”

According to a recent note by rating agency Icra, 28 state governments and two union territories have raised Rs 3.76 lakh crore during April-October 6, 2020, 53.6% higher on a year-on-year (y-o-y) basis. Nearly 74% of the increase in SDL issuance has been led by Karnataka, Maharashtra, Tamil Nadu and Andhra Pradesh, whose issuances rose between 50-343% y-o-y during this period.

On Thursday, the central government said that it would borrow from the market to pay for the goods and services tax (GST) compensation shortfall of Rs 1.1 lakh crore to states, and then act as an intermediary to arrange back-to-back loans to state governments. This marks a softening of its earlier stand that it would not borrow for this purpose.

The revised borrowing mechanism could help ease the steepening of the yield curve, at least for the time being, even though there will be no change in the total borrowings made by the Centre and states. Suyash Choudhary, head – fixed income, IDFC Asset Management Company (AMC), said that the entire additional amount of Rs 1.1 lakh crore is being equally split as three-year and additional five-year borrowing and the same amount will now stretched over additional auctions. “On the margin, this should cause the steepening trend on the bond curve to be arrested, at least for now,” Choudhary said.

, adding, “Thus not only is the additional supply entirely in the three and five year segments, but the market may also draw some comfort from the implied lesser risk of additional borrowing in the current financial year, given that the new calendar runs till March.”