The Reserve Bank of India, RBI, will buy more than a dozen state governments’ bonds worth Rs 10,000 crore on October 22 for the first time making it a test case for future such operations where it could send signals on yields as well. While few know what’s in RBI’s mind with differing yields on different state bonds, investors believe that the operations could lead to convergence of yields.
The RBI will purchase the SDLs (State Development Loans) as it is known in the market parlance through a multi-security auction using the multiple price method. There is no security-wise notified amount, the central bank said in a release. It will aim to buy bonds of 15 state governments including Andhra Pradesh, Arunachal Pradesh, Maharashtra, Gujarat, Kerala, Madhya Pradesh. Those bonds are having residual maturities of about 9-11 years.
Earlier last week, the Reserve Bank of India for the first time declared to purchase state government bonds from the open market as some states had to pay steep funding costs. It buys or sells central government bonds through this route whenever yields move into the volatile territory. This action is also used to manage liquidity in the system. Those bond yields dropped as much as 35 basis points after the Reserve Bank of India had announced plans to buy them last Friday. State government bonds with 20-year maturities, which were yielding in the range of 7.05 – 7.15 per cent before the bi-monthly policy announcement are now trading at 6.7-6.72 per cent, show data compiled by JM Financial. Some of those states include Tamil Nadu, Maharashtra, Gujarat, West Bengal. Other states included in the first-ever proposed in the first-ever bond purchase programme are Assam, Bihar, Chattisgargh, Goa, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Haryana.