RBI to conduct OMOs in State Government Bonds as well…

RBI’s policy today had this interesting announcement. It will conduct Open Market Operations in State Govt Bonds (called as State Development Loans or SDLs):

At present, SDLs are eligible collateral for Liquidity Adjustment Facility (LAF) along with T-bills, dated government securities and oil bonds. To improve liquidity and facilitate efficient pricing, it has been decided to conduct open market operations (OMOs) in SDLs as a special case during the current financial year. The OMOs would be conducted for a basket of SDLs comprising securities issued by states.

The State Governments are going through fiscal problems as GST revenues have shrunk. The State Governments are also in dispute with the Central Govt over sharing of tax revenues. This has led to concerns over SDL interest rates.

Once again a case of fiscal policy problem searching for a monetary policy solution?


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