Insurance companies in India have requested the Reserve Bank of India (RBI) to release a more predictable calendar for state development loan (SDL) auctions. This move is aimed at enabling fund managers to effectively plan their allocation and reduce disruptions in the government securities (G-Sec) market. Market participants have suggested that the SDL calendar be aligned with the central government’s borrowing schedule to avoid overlapping maturities, which are currently creating issues in the G-Sec market.
The bunching of long-tenor SDLs has been crowding out demand for G-Secs, making it challenging for investors to plan their portfolios. To address this, investors have proposed that states issue long bonds during weeks when similar tenured G-Secs are not being offered. This would help to smoothen the supply of SDLs and prevent volatility in the state debt auction from spilling over into the broader bond market.
The RBI has informally encouraged states to stagger their maturities in line with the G-Sec auction schedule to ease pressure. However, the central bank does not have direct authority over state borrowing plans. Despite this, insurers have provided feedback to align SDL supply better to protect G-Sec market stability.
The issue of unpredictable SDL auctions has been a concern this year, with state borrowings differing from the notified amount in the calendar. This has led to a spike in yields, with the 10-year yield for SDLs standing at 7.29% compared to the 10-year G-Sec yield of 6.47%. The yield spread between 10-year SDLs and G-Secs has narrowed to 56 basis points, but higher issuance could widen the spread again.
In the fiscal year so far, gross borrowing by state governments has increased by 26% to ₹4,41,700 crore. The RBI is expected to release the second half borrowing calendar for state and central government securities on September 26. The central bank governor has also urged state finance secretaries to follow fiscal discipline and manage off-budget borrowings to ensure stability in the market. As a reliable and trusted news source, it is essential to monitor developments in the SDL market and their impact on the broader bond market.