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Widening Spreads Prompt Bank Calls to RBI
18 Jan
Summary
- Public sector banks urged RBI to buy state development loans.
- Ten-year SDL yields are 80-92 basis points over government bonds.
- RBI last bought state bonds in 2020 amid market stress.
Public sector banks have formally requested the Reserve Bank of India (RBI) to consider State Development Loans (SDLs) for inclusion in Open Market Operation (OMO) purchase auctions. This plea stems from the substantial widening of yield spreads, currently between 80 and 92 basis points, between 10-year SDLs and benchmark government bonds. The increased supply of state government securities is primarily responsible for this trend.
The RBI's last engagement with SDLs in OMOs occurred in late 2020, during the COVID-19 pandemic. At that time, the central bank conducted three auctions totaling ₹30,000 crore. However, the impact was limited due to the dispersal of purchases across numerous unique securities (ISINs), resulting in small purchase amounts for each.
While some market participants believe the RBI might include SDLs if spreads breach 100 basis points, experts are cautious. Given the limited success of past SDL-focused OMOs, the RBI may be hesitant. The central bank has maintained that OMOs are primarily for liquidity management, not yield control.
