Supporting superior state loans
Since this is the first time the RBI has purchased state government bonds, the modalities should be resolved.
Saugata Bhattacharya, chief economist at Axis Bank, said no statutory changes will be necessary to allow the central bank to buy government bonds. However, the central bank would have to determine how it decides the quantity of purchases for each state and the scope of purchases.
State governments have borrowed nearly Rs 3.76 crore through SDL between April and the first week of October, 53.6% more than during the same period last year, according to ICRA Ratings. According to the loan schedule published by the RBI, they are expected to borrow an additional Rs 2 lakh crore during the October-December quarter.
In recent auctions, increased lending has led to higher spreads for state government bonds. The spread is the additional amount requested by investors over the benchmark central government bond yields.
According to a Care Ratings report, the weighted average yield on SDLs (across all states and holdings) stood at 6.8% as of October 6, about 23 basis points higher than the previous week and 31 bps more than one month ago.
“The announcement of OMO’s RBI on SDL should reduce the yield spread over government securities,” Chari said.
According to Abhishek Upadhyay, Senior Economist at ICICI Securities, SDLs are a risk-free asset, so there are no legislative hurdles preventing the RBI from buying or selling these securities.
“However, there could be logistical problems, unlike the case of government securities, as the RBI will have to decide which states to buy and in what proportion, if they should intervene along the curve and how much variation to allow in terms of prices. cut-off, “he said.” Investor feedback could be useful here in deciding the details of the OMO purchase, in assessing which stocks banks may be willing to bid and, crucially, at the right prices, given that the RBI recently had to reject all bids in a G-Sec OMO auction because otherwise it would have sent an incorrect performance signal. “
RBI’s support for state bonds also comes in the context of an ongoing dispute over GST compensation between the states and the center. If states agree to borrow to fill the gap in GST compensation, the supply of state bonds will increase further.
This step allows states to feel much more comfortable in the second half in terms of indebtedness, said Suvodeep Rakshit, an economist at Kotak Institutional Equities.
