RBI moves to boost bonds issued by states

MUMBAI: The Reserve Bank of India (RBI) has allowed banks to classify bonds issued by state governments as part of the Ujwal Discom Assurance Yojana (UDAY) scheme under the held-to-maturity (HTM) category, two people familiar with the development said. RBI had in a recent letter to the treasury departments of banks said that bonds issued to retire debt given to power distribution companies (discoms) can go to the HTM portfolio of the banks, said a public sector banker, one of the two persons quoted above.

Classification of bonds under HTM shields such investments from mark-to-market losses. Under the UDAY scheme, state governments would convert 75% of the debt of their respective discoms into state government bonds. On 27 February, RBI had indicated that it would consider allowing UDAY bonds to be held under HTM though no formal circular has been issued. State governments that have signed up for the UDAY scheme have already begun issuing bonds to banks.

Power minister Piyush Goyal had on Wednesday tweeted that Rajasthan issued UDAY bonds at a coupon, or interest rate, of 8.39%. This is lower than the 8.55% paid by the state to raise Rs.1,000 crore at the last state government bond auction on 8 March. What makes this possible is a single diktat by the centre that state government bonds issued in lieu of discom loans will be issued at a coupon of up to 75 basis points over the corresponding benchmark 10-year central government bond.