States may seek non-SLR bonds at RBI meeting

"The response to introduction of non-SLR bonds has been mixed. The government obviously feels secure with the present system," said a senior official of the finance ministry under the Punjab government.

RBI Governor Y V Reddy and one of the four deputy governors will be attending the meet, state government officials said.

State government officials will meet RBI officials on Friday in Mumbai to plan out their borrowings for the current financial year that ends in March 2009. As of now, states take clearance from the central government and RBI raises funds through auctions in the secondary market.

At these auctions, demand is typically from state-run banks for their SLR-related requirements.

However, states now feel that with the amendment of SLR ceiling at RBI's discretion, the current 25 per cent SLR floor could be lowered in the long run and the demand for state loans would dry up.

The Cabinet had approved an ordinance last year, allowing RBI to change banks' SLR ceiling.

"They (RBI) can remove the floor. Then who will go for these state loans?" said a senior Goa government official.

There has been informal communication between the Centre and state government officials over the introduction of non-SLR bonds, officials said.

State government officials said present market conditions were not in favour of raising money through auctions, as investors were on a selling spree due to persistent concerns on inflation.

The yield on the most-traded, 10-year gilt 8.24 per cent, 2018 bond has gone up 9 basis points this week, partly driven by inflation concerns.

It had ended at 7.89 per cent on Friday, as against 7.88 per cent on Thursday.

Officials favouring the introduction of non-SLR bonds will also ask RBI to set up a separate trading platform for these securities.

"Non-SLR bonds would help align with the market levels, as they would be at the market determined rate," the Goa government official said.

Officials want RBI to include primary dealers, as market makers for these bonds on an electronic trade platform akin to the Negotiated Dealing System - Order Matching Segment.

Under the Public Debt Act, debt instruments issued by ULBs are "government securities".