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Photo: Aniruddha Chowdhury/Mint
Photo: Aniruddha Chowdhury/Mint

RBI to purchase state government bonds through auction next week

  • In its recent policy, RBI had announced its decision to conduct the OMO of these state development loans to ensure liquidity and support the state government borrowing program

MUMBAI : The Reserve Bank of India on Friday said that it will conduct the first ever purchase auction of state government bonds for an aggregate amount of 10,000 crore through open market operations (OMO) on 22 October 2020.

“It has been decided to conduct a purchase auction of SDLs under Open Market Operations (OMOs) for an aggregate amount of 10,000 crores on October 22, 2020, keeping in view that this is the first ever OMO purchase of SDLs. Depending on market response, the size of the auctions may be enhanced in the subsequent auctions," said RBI in its release.

The central bank also added that it reserves the right to decide on the quantum of purchase of individual securities, accept bids for less than the aggregate amount, purchase marginally higher/lower than the aggregate amount, accept or reject bids.

In its recent policy, the RBI had announced its decision to conduct the OMO of these state development loans to ensure liquidity and support the state government borrowing program.

On Thursday, the finance ministry said that the central government will borrow 1.1 lakh crore under the special window to meet the shortfall of Goods and Services Tax (GST) compensation. The amount borrowed will be passed on to the states as "back-to-back loan in lieu of GST compensation cess.

The state governments are expected to borrow as much as 2 trillion in Q3FY21, 33% higher than the actual amount of 1.5 trillion last year. This could result in increased SLD issuances in the fourth quarter as they scrabble for funds amid sharp contraction in their own tax collections and shortfall in GST compensation cess at Rs2.35 trillion.

State governments have borrowed nearly 3.76 lakh crore through SDLs between April and the first week of October, 53.6% higher than during the same period in the previous year, according to ICRA Ratings.

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