RBI move to conduct OMO on state development loans could be a game changer

By facilitating the OMOs, the central bank is assuming a much bigger role than earlier. Some have started comparing the RBI with European Central Bank

The Reserve Bank of India’s decision to conduct secondary market purchases of state development loans (SDL), or bonds issued by states, is just the thing needed for investors to take these bonds seriously and start trading on them.

So far, the central bank has been assuring the markets that SDLs are safe, and there is an implicit guarantee on these bonds. The central bank maintains a consolidated sinking fund (CSF) from which market borrowings of states are serviced, and a guarantee redemption fund (GRF), which can be used if there is a default.

Still, foreign investors in particular have been