RBI pilot to boost SDL liquidity; impact on yields likely to be gradual

States and Union territories plan to raise up to ₹2.54 trillion through SDLs in the first quarter of FY27, lower than market expectations of up to ₹3 trillion

The Reserve Bank of India’s (RBI’s) pilot Benchmark Issuance Strategy (BIS) for state borrowings is expected to improve transparency, liquidity, and price discovery in the State Development Loan (SDL) market, although its impact on borrowing costs is likely to be gradual, market participants said.

 

States and Union territories (UTs) plan to raise up to ₹2.54 trillion through SDLs in the first quarter of FY27, lower than market expectations of ₹2.75-3 trillion. “The amount is lower than expected, and the introduction of BIS is positive for the market,” a dealer at a primary dealership said.

 

Under the pilot framework, nine states — Andhra Pradesh, Bihar, Chhattisgarh, Kerala, Madhya Pradesh, Maharashtra, Rajasthan, Telangana, and Uttar Pradesh — are set to raise about ₹1.54 trillion through structured issuances during the quarter. These states will issue securities across predefined benchmark maturity buckets, in line with a pre-announced borrowing calendar.

 

States had borrowed heavily through SDLs in FY26, with second-quarter issuances slightly exceeding the indicative borrowing calendar, the first such instance in seven quarters. FY26 also saw a significant increase in the average tenor of state borrowings, leading to a demand-supply mismatch. States such as Telangana, Kerala, West Bengal, Punjab, Maharashtra, Madhya Pradesh, Rajasthan, and Bihar sharply increased their issuance tenors.

 

The new strategy aims to reduce fragmentation in the SDL market by concentrating issuances in standardised tenors, creating larger and more liquid benchmark securities. This is expected to enhance price discovery and provide investors with better visibility on supply.

 

The remaining states and UTs are likely to raise around ₹1.01 trillion through the conventional route, where issuance timing is more flexible and maturities are less standardised.

 

According to the RBI, the strategy is intended to bring greater discipline and predictability to state borrowing programmes while improving transparency for investors. “As their cash and debt manager, the RBI has been sensitising states on adopting the BIS for market borrowings,” the central bank said in a release, adding that the pilot has been introduced with the consent of participating states from FY27.

 

Market participants said the benefits of the framework would be seen over time, as continued heavy supply of state bonds may limit any immediate impact on yields and spreads. However, a more structured issuance pattern is expected to reduce uncertainty, attract broader investor participation, and support the development of the state bond market.

 

The RBI added that the framework could be extended to more states over time as part of efforts to further deepen the market.