The Reserve Bank of India (RBI) wants to make it mandatory for state governments to invest in sinking and guarantee redemption funds to provide comfort to investors having exposure to state development loans. The contribution to such corpus is currently voluntary.
The central bank, which acts as a debt manager for the state governments and the Centre, is also considering the idea of state governments with surplus cash lending to the states which are in deficit.
Analysts look at these as potentially good prudential steps to enhance fiscal discipline and profile as states raise more and more resources from market. But implementing them under the present legal framework will be a task and may require some changes in laws and rules.
B P Kanungo, the RBI’s deputy governor, in a speech last week on the state governments’ market borrowings said the corpus of the two funds maintained with the RBI is intended to provide a cushion to the state governments in meeting the future repayment obligations.
States which maintain these funds are holding different levels of investments in terms of their outstanding liabilities. There is merit in making investments in Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF) mandatory for state governments.
There is also merit in specifying a minimum threshold in terms of their outstanding liabilities to provide greater comfort to investors, he said.
The RBI has lowered the rate of interest on special drawing facility (SDF) from 100 bps below the repo rate to 200 bps below the repo rate to incentivise adequate maintenance of funds and to encourage the states to increase the corpus of these funds, the deputy governor said.
Aditi Nayar, vice president, principal economist, ICRA, said mandating a threshold level of investment by the states in their CSF and GRF could be considered, with the level to be achieved over a period of time, to spread out the fiscal burden.
It is important to encourage states with higher leverage levels to raise the size of their CSF and GRF. States could also be encouraged to use their existing surplus cash balances to enhance the size of these funds.
On allowing inter-state lending, Kanungo said state governments have in the past been demanding, and rightly so, greater avenues to invest their surplus cash balances. Perhaps, the cash surplus governments could lend to those in deficit at a rate linked to the market. Of course, this would need to be budgeted for.
Nayar said using surplus cash balances to lend to other states may provide an appreciably higher return than the existing practice of investing in the Government of India’s treasury bills. However, the process for allowing the same is unclear.
The RBI is giving primacy to enhancing certainty in state development loans issuing timetable. While the Central government is known to adhere to the borrowing calendar published every half year (HY), the state governments do not adhere to their quarterly calendars.
Such deviations leave the market to second guess their market borrowing. Communication to the market as well as predictability is critical for credibility of the borrowing programme, Kanungo said.