'Maharashtra, Gujarat, AP & TN's bonds to top foreign investors' choice'

These bonds are being preferred due to their market liquidity

As the doors open further for foreign investment in state government bonds, papers issued by Maharashtra, Andhra Pradesh, Tamil Nadu and Gujarat would be preferred by foreign portfolio investors due to their market liquidity, India Ratings has said. India Ratings and Research in a report said differentiation between states will be at the forefront as investment theme for state development loans (SDLs), also known as bonds, floated by state governments.

The rating agency has prepared a market-based ranking of states quantifying SDLs’ liquidity in both primary and secondary markets and arrived at a combined score.

Maharashtra SDLs have relatively deep liquid primary and secondary markets, the manifestation of which is reflected in the nearly lowest spread it pays.

Currently, the SDL spreads are in the tight range of +/-5 basis point at a point in time, as they are largely treated as a generic asset class.

A widening investor base and improving efficiency in the market are likely to enhance information transparencies in the market and consequently lead to finer pricing of SDLs based on their actual credit quality and market liquidity, the report said.

The wide divergence in market activity of SDLs is not fully reflected in their spreads.

Consequently, spreads are set to widen in future even as evolving fundamental credit quality will have its share of implications, the rating agency said.

The credit differentiation could provide depth to the SDL market. The fiscal performance and credit quality of states would have an impact on SDL performance in the longer term.

A shift from the buy-and-hold investor base to a more diverse set of investors will take this aspect into consideration and eventually, states with better liquidity scores are likely to command finer premiums, it added.