RBI may set new pricing norms for state debt in phases

But sources say RBI has not made a final decision yet

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, three officials familiar with the discussions told Reuters.

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, the officials said, although they noted the RBI has not yet decided whether it will implement the proposal.

The officials added 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.

"There is a talk going on to implement the valuation rules in tranches," one official told Reuters, adding that such a step will help banks limit the losses on their existing state debt.

All officials declined to be identified because they were not authorised to speak to the media.

The RBI did not have an immediate comment.

The RBI in February 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.

Yet the officials dismissed these market concerns, saying 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 trillion ($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 Rs 50,000 crore of debt on behalf of states during April to June, including Rs 8,416 crore later on Tuesday.

The RBI will consult the Fixed Income Money Market And Derivatives Association Of India before adopting any decisions, the sources said, and is due to hold further discussions with state government officials early next month.

"State governments are not comfortable paying such high rates. It could have a negative impact on states for raising money through market borrowings if the proposals are adopted," said an official at Tamil Nadu state.

($1 = 60.4750 rupees)