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RBI may Set New Pricing Norms for State Debts
Apr 28, 2014

The Reserve Bank of India is discussing ways to ensure an orderly rollout of its unpopular proposal to price state government debt at market-based valuations to minimise potential losses for banks holding this debt. Holders of state debt—which are largely made up of banks—could be pushed to mark them to market prices in several stages as opposed to in one go, although the RBI has not yet decided whether it will implement the proposal.

The central bank is also considering adopting a uniform pricing method used for government bonds to sell state debt. Under this method, debt is allocated to bidders at the same prices and is considered to be less volatile.

The RBI in February 2014 proposed to scrap a 14-year old system that allows banks to value state debt at a fixed spread of a quarter-percentage point over government bonds, which had given more certainty to issuers and investors, but raised worries that it did not properly reflect the pricing of state credit.

Investors and state issuers are not keen to switch to market-based valuations, fearing big losses on their portfolios. The RBI is of the view that state debt should not be priced too far above government debt given they share a sovereign guarantee.

Still, policy makers are proceeding cautiously, especially as government bonds have been volatile because of concerns of a sizeable Rs. 6 lakh crore ($99.21 billion) in gross borrowing scheduled to hit markets in the April to March fiscal year. The central bank also plans to sell around R.s 50,000 crore of debt on behalf of states during April to June, including 84.16 billion rupees.

The RBI will consult the Fixed Income Money Market and Derivatives Association of India before adopting any decisions.


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