Comments
The Reserve Bank of India, on Friday, cautioned that the increasing reliance on borrowing by States has raised concerns both from the supply and demand side, and must be managed to minimise any adverse effects on yields.
“Average spreads of State Development Loans (SDL) yields over Central Government securities of corresponding maturity have increased from 38 basis points (bps) in 2014-15 to 59 bps in 2017- 5 18, signifying an increase in the cost of borrowing for the States.
“As the investor base for Government Securities (G-Sec) and SDLs are almost same, the continuous and large supply of SDLs had resulted in hardening of yields of Central Government securities also,” said RBI Deputy Governor BP Kanungo, at a Financial Market Conclave, organised by the Bengal Chamber of Commerce and Industry.
Corporate bonds
Referring to an internal study by the RBI and Central For Advanced Financial Research and Learning (CAFRAL), Kanungo said the rise in yields on State government paper ends up pushing spreads on corporate bonds.
“Unlike Central Government debt which crowds out bank credit, SDL crowds out corporate borrowings in the bond market by increasing costs. A one percentage point increase in the ratio of State debt issuance to GDP, results in a 11 per cent decline in the volume (in rupees) of corporate bonds issued in FY2016.
“High-rated corporate bonds, and those with longer maturity, have a greater propensity for being crowded out by SDLs which work as substitutes,” he said.
The Deputy Governor said since the economy is poised for higher growth trajectory, the private sector’s demand for domestic funding is expected to significantly accelerate in the coming years. Hence, stakeholders would have to be sensitive to not only that of their own interest expenses but also to that of the financial sector.
Kanungo warned that in a market confronted by reduced pre-emption in the form of SLR, reduction in HTM (Held-to-Maturity bucket of investment) and likely adoption of IFRS that will seek to mandate mark-to-market (MTM) accounting, the demand for government bonds could be impacted.
According to Kanungo, Foreign Portfolio Investors (FPI) cited lack of information on the financial position of States between two budgets, and opacity of State Government (SG) operations was one of the main reasons for the lackluster interest in SDLs despite the yields they have to offer.
There is, hence, a need to reach out to investors by introducing transparency and making accessible high frequency data on State finances in public domain.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.