Move to improve liquidity, pricing in state development loans (SDLs)
MUMBAI/October 16: Like in the case of Central Government securities (G-Secs), the Reserve Bank of India (RBI), is all set to launch open market operations (OMO) in the state development loans (SDLs), the bonds issued by states to borrow from market.
“The RBI has decided to conduct purchase auction of SDLs under OMOs for an aggregate amount of Rs10,000 crore 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,” the RBI release said.
Accordingly, RBI will purchase the SDLs through a multi-security auction using the multiple price method. There is no security-wise notified amount.
The Reserve Bank said 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 due to rounding-off and to accept or reject any or all the bids either wholly or partially without assigning any reasons.
At present, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds. The new move is expected to improve liquidity and facilitate efficient pricing. The OMOs would be conducted for a basket of SDLs comprising securities issued by states.
SDLs to be more liquid
The RBI Governor, Saktikanta Das had announced this move on October 9 while announcing the monetary policy. Talking to businessbenchmark.news, V. Viswananthan, a senior banker specialised in government bonds, said over phone that the RBI move will help SDLs, which are illiquid now, move over to trading and become liquid.
Moreover, the SDLs, which are now almost uniformly priced among states, irrespective of their financial standing at the primary auction, will now start attracting dynamic pricing depending on the health of the respective state finances.
SDLs are very important as far as states are concerned as the lion’s share of the states’ fiscal deficit is financed through the issue of SDLs. In the case of Kerala, about 70 per cent of its deficit is funded through the issue of SDLs.