State Development Loan

When people say "government bonds" in India they usually picture the Centre. The workbook widens the picture: other than Central Government Securities, the government bond market also includes the securities issued by the various State Governments and Union Territories, which are known as State Development Loans (SDLs).

So an SDL is simply a State's dated bond. It pays a coupon, has a fixed maturity and is part of the G-Sec market, which the workbook describes as one of three issuer-based segments of the Indian debt market: government debt, with the Government of India issuing dated papers and Treasury Bills and State Governments issuing State Development Loans of various maturities; PSUs and banks; and the private sector.

The one structural difference to remember: the central government mobilises funds mainly through Treasury Bills and dated securities, while a State Government does so solely through dated securities. There is no State Treasury Bill.

Because they are government borrowings, SDLs sit at the low-risk end of the market. The workbook notes that, because of their relatively low risk, government bonds typically pay lower interest rates than bonds of other issuers in the country.

Who manages the borrowing. The Reserve Bank of India manages the borrowing of the Central and State Governments, including the Union Territories, and regulates the G-Sec and money markets. SEBI's role in government securities is limited to exchange-traded contracts on them.

Primary issuance. The RBI issues government securities on behalf of the government through auctions, which may be yield based or price based:

The minimum bid is ₹10,000 and multiples of ₹10,000. Institutions bid competitively; retail investors can use non-competitive bidding and are allotted at the weighted average price or yield of the accepted competitive bids.

Buyback. The Government of India and State Governments can buy back existing securities before maturity. States can buy back high coupon securities to reduce interest outflows when interest rates are falling, with provision made in the budget. A large buyback goes through an auction; a smaller one through the secondary market on NDS-OM.

Other State paper. The workbook also lists Ujwal Discom Assurance Yojana (UDAY) Bonds as a State Government borrowing instrument.

Valuation. Chapter 8 says FBIL is responsible for the valuation of G-Secs and SDL portfolios, which were previously valued by FIMMDA.

A State refinancing costly debt (illustrative figures). A State Government has ₹1,000 crore of a 9% SDL outstanding. Rates have fallen, and new ten-year State paper now clears at about 7%.

Interest on the old loan each year: 9% × ₹1,000 crore = ₹90 crore.

Interest if refinanced at 7%: 7% × ₹1,000 crore = ₹70 crore.

Annual saving before the cost of the buyback: ₹90 crore − ₹70 crore = ₹20 crore.

This is the workbook's reason for State buybacks: reduce interest outflows when interest rates show a falling trend. Two practical points follow from the rest of Chapter 1. First, when yields fall, bond prices rise, so the State will have to pay more than face value to buy the 9% bond back, which eats into the ₹20 crore. Second, at ₹1,000 crore the buyback is large, so the workbook's route is an auction rather than NDS-OM.

A retail angle (illustrative). Priya bids ₹50,000 non-competitively in the auction. She names no yield. If the accepted competitive bids average 7.05%, that is the yield she is allotted at.

Chapter 1 (Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Markets) defines SDLs among government bonds in section 1.3.1.1, and in section 1.14 describes the three segments of the debt market, the rule that States borrow solely through dated securities, auctions, buybacks and the RBI's role in managing State borrowing. Chapter 8 (Regulatory Environment) notes that FBIL values SDL portfolios. Expect a question on which instrument a State cannot issue, who manages State borrowing, and why a State would buy back its own bonds.

• States issue no Treasury Bills. They borrow solely through dated securities; the Centre uses both.
• SDLs are issued by States and Union Territories, and the RBI manages that borrowing, not SEBI.
• Buyback of high-coupon SDLs saves interest when rates are falling, not rising.
• Large buybacks go by auction; smaller ones through NDS-OM.
• FBIL now values SDL portfolios; FIMMDA did it earlier.
• UDAY Bonds are a separate State instrument listed alongside SDLs, not another name for them.
• Exchange-traded interest rate options in the workbook are written on GOI dated securities. Hedging an SDL with a GOI bond contract is the kind of instrument mismatch the workbook says leads to an imperfect hedge.