RBI Announces First Open Market Operation In State Bonds

The Reserve Bank of India will buy Rs 10,000 crore in state government bonds under its first such open market operation aimed at easing the borrowing pressure on states.

The RBI has identified debt across 15 states for purchase. It has not specified either the amount it will purchase from each state or the amount for each securities identified.

As in the case of all open market operations, the RBI reserves the right to decide on the quantum of purchase of individual securities and accept bids for less than the aggregate amount, the central bank said in a release on Friday.

The indicative borrowing calendar from states for the October-December quarter suggests that they will borrow an additional Rs 2 lakh crore in this period. However, earlier this week, the government permitted some states to raise an additional 0.5% of gross state domestic product after they agreed to borrow to meet the shortfall in GST compensation.

On Thursday, the government changed its position on GST compensation shortfall and said that the centre would borrow an additional Rs 1.1 lakh crore and on-lend to states. In the accompanying statement, the Ministry of Finance said that it expects that general government borrowings would remain unchanged as states may borrow a lower incremental amount now that the centre will finance the GST compensation shortfall.

The change in view is positive for the market for state development loans but comes as a negative for central government securities. Bond yields on 10-year government bonds rose marginally by 2 basis points to 5.91% in trade on Friday.

“While the overall demand-supply balance (across state + central government) of bonds is unchanged, we see this as a negative near-term development. However, while the government’s financing challenges (due to the wider fiscal deficit) remain, they may now be less inclined to rely on market borrowing to finance this gap,” said Nomura in a note on Friday.