Insurers seek predictability in auctions of state bonds

Mumbai: Insurance companies have urged the Reserve Bank of India to publish a more predictable calendar for state development loan (SDL) auctions. They also requested that states adhere to the borrowing schedule so that fund managers can effectively plan their allocation.

Market participants further suggested that the SDL calendar be aligned with central government borrowing, as overlapping maturities are creating disruptions in the government securities (G-Sec) market.

At recent meetings with the central bank, investors flagged that bunching of long-tenor SDLs is crowding out demand for G-Secs, complicating portfolio planning. They have suggested aligning SDL maturities with the central government’s auction calendar. For instance, states can issue long bonds in weeks when no similar tenured G-Secs are on offer.

“The RBI has no direct authority over state borrowing plans, but is informally nudging issuers to smoothen supply as volatility in state debt auction risks spilling over into the broader bond market,” said an insurance executive who attended the meeting.
This was discussed during the second half calendar borrowing meeting. “Insurers have given feedback to align SDL supply better to protect G-Sec market stability,” said another source. Second half borrowing calendar for state and central government securities is expected on September 26.

To ease pressure, the RBI informally suggested to the states about staggering maturities in line with the G-Sec auction schedule. An email to the RBI did not elicit a response.Last week the Reserve Bank governor, in a meeting that reviewed market borrowings by the states, urged state finance secretaries to follow fiscal discipline and manage off-budget borrowings.State borrowings have differed from the notified amount in the calendar this year, adding to the spike in its yields. In the auction on Tuesday, eleven states raised ₹25,000 crore, higher than the calendar estimate of ₹20,100 crore. In the previous week, six states borrowed ₹14,900 crore, against the notified amount of ₹15,300 crore.

“Although the SDL G-sec spread narrowed to 56 basis points, higher issuance this week could widen the SDL G-sec spread again,” according to a report by ICICI Bank. Yield spread between 10-year SDLs and G-secs stood at 1.05% in September, when typically SDLs have a 40-50 basis points difference over G-sec yield.

The 10-year yield closed at 6.47%, while the 10-year yield for the SDL auction on Tuesday was at 7.29%, RBI data showed. In the fiscal year so far, gross borrowing by state governments has increased 26% to ₹4,41,700 crore.