STATE DEVELOPMENT LOAN

Subject: Economy

Context : The Reserve Bank of India said it will conduct the first ever purchase auction of State Development Loans (SDLs) under Open Market Operations (OMOs) for an aggregate amount of ₹10,000 crore .

Concept :

• State Development Loans (SDL) are debt issued by state governments to fund their fiscal deficit. States in India like the centre run budgets where expenditure is higher than revenue leading to deficits.
• The deficit by the states is financed partly through market borrowings in the form of SDL.
• SDL issues are managed by the RBI, which also makes sure that the SDL’s are serviced by monitoring escrow accounts for payment of interest and principal.
• The SDL market is similar to that of the government bond market. . The participants in the SDL market include banks, insurance companies, provident and pension funds, mutual funds and other institutional participants.
• SDL’s qualify as approved SLR (Statutory Liquidity Ratio) security and are also qualify as approved investments for insurance companies, provident and pension funds and trusts.
• SDL’s also qualify for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI.