RBI sets some state loans' cut-offs at six-month low

NEW DELHI (Reuters) - The Reserve Bank of India (RBI) set cut-off yields on Monday for some state government bonds at a six-month low, in the first tranche of auctions for the financial year 2016/17, due to lower amounts, strong demand from state-owned banks and insurers, traders said.

Nine state governments sold debt for 92.65 billion rupees ($1.39 billion), lower than an average 160 billion rupees per auction in the previous quarter.

The lower cut-offs are likely to come as a relief for state governments, given the fear of higher costs of debt, as their market borrowing is seen up by around 20 percent compared with last year.

The RBI set a cut-off yield of 7.98 percent for 10-year bonds raised by Kerala, Meghalaya, Nagaland, Punjab, Rajasthan, levels last seen on Oct. 13.

Some traders said a large state-owned insurer may have absorbed a chunk of the debt sale.

The cut-off yields were in 7.98 to 8.02 percent range.

"The kind of aggressive bids we have seen looks like investment demand because there is a seasonal increase in inflows, and till date only one-two government bond auctions occurred, so deployment opportunities have been less," said a senior official with a foreign bank.

During the quarter, states can borrow up to 105 billion rupees as part of their fortnightly debt auction, the RBI's indicative borrowing calendar showed.

India's federal government and states are expected to issue 9.5 trillion rupees in bonds this financial year, while states are also likely to sell 1 trillion rupees in debt, tied to a bailout of their utilities.

($1 = 66.5750 rupees)

(Reporting by Neha Dasgupta; Editing by Sherry Jacob-Phillips)