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State Government Yield Spreads – Do Fiscal Metrics Matter?

08-Dec-2017: The Reserve Bank of India today placed on its website the eighth release under the series ‘Mint Street Memos (MSM)’ titled “State Government Yield Spreads – Do Fiscal Metrics Matter?”.

The paper authored by Seema Saggar, Rahul T and Madhusudan Adki from Internal Debt Management Department analyses the causes of spreads of State Development Loans (SDLs) relative to the yields of central government securities of corresponding maturity.

Spreads of state development loans (SDLs) relative to the yields of central government securities of corresponding maturity appear to be caused by illiquidity and prevailing market conditions. Nevertheless, inter-state variations are hardly observed in market pricing of the loans in primary auctions. This presents little market incentives for state governments to improve their fiscal positions and lower their debt.

The views and opinions expressed in MSM series are those of the authors and do not necessarily represent the views of the RBI.

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