The Hindu Business Line : Dealers expect lukewarm response to State loans

THE market response to the on-tap sale of Rs 6,200-crore State development loan beginning November 2, may be lukewarm, according to money market dealers.

According to them, in the current situation, banks and primary dealers may not be too keen to subscribe to the 10-year paper carrying a coupon rate of 7.36 per cent.

In the case of on-tap sale, the RBI fixes the price and yield for the paper in advance on behalf of the State Governments; also the sale is kept open for as long as required. Bidders can bid for specific amounts of loan they might be willing to subscribe.

The sale does not form part of the bidding commitment requirements of PDs.

Besides, there are concerns over the liquidity position with another auction of Government securities worth Rs 8,000 crore slated between November 1 and 8, said a primary dealer in Government securities.

As banks are trying to cut down their huge SLR holding, they may not bid for fresh papers.

Also, credit offtake has been encouraging in recent months, hence, this sale is not much of an incentive to banks, said a dealer.

Notably, the previous on-tap sale of 9-year State loans at 6.35 per cent on July 28 was undersubscribed by nearly 22 per cent. Of a target amount of Rs 8,500 crore, subscriptions were received only for Rs 6,663 crore.

Market participants said the sale to be held on November 2 is likely to be kept open for more than two or three days as a favourable response is unlikely.

Yield on the 10-year benchmark paper, 7.37 per cent 2014 went as high as 6.99 per cent intra-day on October 28, the day after the announcement of the sale. The announcement had the effect of adding to the bearish sentiment in the market.

Market participants said that the spread between a G-Sec and a State loan paper should be nearly 50 basis points, taking into account the risk factor. But, in this case, the spread has narrowed to nearly 40 basis points, which is a negative signal for the money markets. The previous State loan on tap sale of 10-year State development loan had a fixed coupon of 5.70 per cent. This sale was held in respect of 19 State Governments on May 26, for a target amount of Rs 8,000 crore and had received subscriptions aggregating Rs 9,350 crore.