Home >Industry >Banking >RBI buys 10,000 crore of state bonds

Mumbai: The Reserve Bank of India on Thursday purchased 10,000 crore of state government bonds through its first ever open market operations announced in the recent policy. While RBI received bids worth 15,475 crore, it accepted only the notified amount.

The central bank offered to purchase 1505 crore worth of 7.78% Maharashtra SDL 2029 and 1199 crore worth of 7.17% Karnataka SDL 2029. The cut off yields across SDLs varied from 6.47% to 6.55%.

“The maiden SDL OMO has met with decent appetite. The bid cover ratio was 1:1.5 times. Hence this OMO will be instrumental in pulling down spreads. Today’s cut off was however at the market levels," said Lakshmi Iyer chief investment officer (debt) & head- products, Kotak Mahindra AMC. “Most of the bonds on offer for sale were high coupon bonds which are largely less liquid" she added.

In its recent policy in October, RBI had said that it will conduct OMO of state development loans to improve secondary market activity and rationalize spreads of SDLs over central government securities of comparable maturities.

"In order to impart liquidity to SDLs and thereby facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year," it said.

The decision to purchase SDLs through OMO led to a decline in borrowing costs for states. 13 state governments raised a total of 19,250 crore through the auction held last week.

According to Care Ratings, the funds were raised at a weighted average borrowing cost of 6.5%, which was 30 bps lower than two weeks ago. The spread between 10-year SDL and government securities also narrowed to 68 basis points.

So far in the current fiscal year, 28 states and 2 union territories have cumulatively raised a total of 3.95 lakh crore via market borrowings compared to 2.59 lakh crore in the corresponding period of fiscal year 2019-20.

The RBI’s decision to conduct OMOs of state bonds comes against the backdrop of an ongoing tussle over GST compensation between states and the centre. While 21 states, mainly ruled by Prime Minister Narendra Modi's party and its allies have agreed to borrow from the market, around 10 which are run by opposition parties insist that the federal government should borrow and compensate them.

Under the 2017 national goods and services tax (GST), the federal government was mandated to compensate states until 2022 if their revenue growth fell below 14% a year. But states now facing a tax shortfall of about 3 trillion rupees ($41 billion) in the financial year ending in March as a result of the coronavirus crisis, are only likely to get about 650 billion rupees from the federal government.

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