States, UTs set to borrow Rs 3.16 trillion through SDLs in March quarter

Overall, in Q3FY21, gross SDL issue was Rs 2.02 trn

State governments and Union Territories (UTs) plan to raise Rs 3.16 trillion through state development loans (SDLs) in January-March 2021, the last quarter of the current fiscal year (Q4FY21).

The Reserve Bank of India (RBI), in consultation states and UTs firmed up, has the indicative borrowing plan for raising funds from the market.

Aditi Nayar, principal economist, ICRA, said the indicative amount is lower than the estimate of Rs 3.5 trillion. 

The revenue flows have improved in the case of some states. Besides, some states are taking assistance of state-owned undertaking to raise funds. 

The revenues from goods and services tax (GST) in December and the remaining part of the current financial year will have bearing on the actual amounts raised by states from the market, Treasury executives said.

States and UTs have raised Rs 5.51 trillion in April-December 2020. Overall, in Q3FY21, gross SDL issuance stood at Rs 2.02 trillion, 24.9 per cent more than 1.61 trillion in Q3FY20.

SDL redemptions in the third quarter are estimated to have declined to Rs 443 billion, from Rs 394 billion in the corresponding period a year ago. Accordingly, the net SDL issuance increased 28.8 per cent to Rs 1.57 trillion in Q3FY21, from Rs 1.22 trillion in Q3FY20.

In an encouraging development, the RBI conducted open market operations (OMOs) in SDLs for the first time in Q3FY21. 

The central bank purchased Rs 100 billion SDLs in each of the three SDL OMOs held in Q3FY21, in the nine-11-year maturity buckets.

Despite this, the spread between the weighted average 10-year SDL cut-off and the 10-year Government of India bond rose to 69 basis points in Q3FY21, from 64 basis points in Q2FY21. The spread had declined from an elevated Rs 100 bps in Q1FY21.

The trajectory of yield on upcoming bond issuances will be shaped by the pricing of Government of India paper and the volume of OMO conducted by the RBI in state bonds.