For the first time, RBI to carry out open market operations in state bonds

The Reserve Bank of India (RBI) today announced to conduct its first-ever purchase auction of the state government securities worth Rs 10,000 crore. The RBI has said the size of the OMO could be enhanced if it gets good response. "It has been decided to conduct a purchase auction of SDLs under Open Market Operations (OMOs) for an aggregate amount of Rs 10,000 crores on October 22, 2020, keeping in view that this is the first-ever OMO purchase of SDLs. Depending on market response, the size of the auctions may be enhanced in the subsequent auctions," RBI said in a statement today.

The Reserve Bank said it reserves the right to decide on the quantum of purchase of individual securities. It can also accept bids for less than the aggregate amount or marginally higher/lower than the aggregate amount due to rounding-off and can accept or reject bids without assigning any reasons.

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The eligible participants must submit bids in electronic format on the Reserve Bank of India's Core Banking Solution (E-Kuber) system between 10:00 am and 11:00 am on October 22, 2020, the RBI said. "Only in the event of system failure, physical bids/offers would be accepted," it added.

The result of the auction will be announced on the same day and successful participants should ensure availability of the requisite amount of securities in their SGL account by noon on October 23. The RBI decision to conduct OMO of state development loans follows after its policy announcement this month, in which it vowed to provide additional liquidity to states in the wake of COVID-19 pandemic.

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Due to the economic losses amid COVID-19 pandemic, states are expected to borrow around Rs 2 lakh crore in the third quarter of the fiscal year. In FY20, the states borrowed Rs 1.5 lakh crore only. As per ratings agency ICRA, from April-October first week, states borrowed Rs 3.76 lakh crore via state development loans. This is around 53.6 per cent higher than the last fiscal.

Also read: RBI announces OMO purchase of govt securities worth Rs 10,000 crore

The government this week also announced it will borrow funds to bridge the goods and services tax (GST) revenue shortfall of Rs 1.1 lakh crore. The borrowed amount will be passed on to the states as a back-to-back loan instead of GST compensation cess releases. "Under the Special Window, the estimated shortfall of Rs 1.1 lakh cr (assuming all States join) will be borrowed by Government of India in appropriate tranches," Finance Ministry said in a statement.

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