Bond Market Pulse: States Raise Rs 250 Billion Via SDLs As Yields Hold Firm Across Tenures

India’s state governments collectively raised Rs 250 billion through State Development Loans (SDLs) in the latest auction conducted by the Reserve Bank of India (RBI), falling short of the targeted Rs 270 billion. The auction, held on September 23, 2025, saw active participation from institutional investors, with cut-off yields reflecting a steady appetite for long-duration sovereign-backed instruments.

 

The SDL issuance comes amid tightening liquidity conditions and rising fiscal needs across states. Despite the shortfall in aggregate borrowing, the cut-off and implicit yields across tenures indicate stable demand, particularly for longer-dated papers from fiscally active states such as Telangana, Bihar, and Madhya Pradesh.

 

Key Highlights From The SDL Auction

 

- Eleven states raised Rs 250 billion via SDLs, below the Rs 270 billion target  

- Telangana, Bihar, and Madhya Pradesh issued long-tenure bonds with cut-off yields at 7.44 to 7.45 percent  

- Tamil Nadu’s 10-year bond cut-off yield stood at 7.26 percent  

- Implicit yields on Tamil Nadu SDLs ranged from 7.02 to 7.17 percent across 2031 to 2033 maturities  

- Punjab’s 2033 SDL showed the highest implicit yield at 7.3886 percent  

- Chhattisgarh’s 2029 SDL recorded the lowest implicit yield at 6.6691 percent  

- Gujarat and Kerala SDLs priced at 7.07 and 7.44 percent respectively  

 

Yield Trends And Investor Appetite

 

The auction revealed a clear preference for longer-duration SDLs, with multiple states issuing bonds maturing beyond 20 years. Telangana led the pack with four separate issuances—22, 23, 24, and 26-year bonds—all priced at a uniform cut-off yield of 7.44 percent. Bihar followed with 20 and 25-year bonds at 7.45 percent, the highest yield in the auction.

 

Investor interest was driven by:

 

- Attractive spreads over central government securities  

- Sovereign backing and zero credit risk classification  

- Long-term asset-liability matching for insurers and pension funds  

- Stable macroeconomic indicators supporting fiscal sustainability  

 

Tamil Nadu’s SDLs continued to attract demand, with implicit yields on its 2031, 2032, and 2033 bonds ranging from 7.0205 to 7.1796 percent. The state also issued a 10-year bond with a cut-off yield of 7.26 percent, reflecting its consistent borrowing strategy and fiscal transparency.

 

Liquidity Conditions And Auction Dynamics

 

The auction took place against a backdrop of tight liquidity in the banking system, with net outflows driven by advance tax payments and GST collections. Despite this, the SDL supply was largely absorbed, indicating robust demand from long-term investors.

 

Key auction dynamics included:

 

- Competitive bidding across maturities, especially 20–26-year papers  

- Yield compression in shorter tenures due to limited supply  

- Preference for SDLs over corporate bonds amid risk aversion  

- Active participation from life insurers, EPFO, and mutual funds  

 

The spread between the 10-year SDL and the benchmark 10-year G-sec widened to 53 basis points, up from 30 basis points in the previous auction, signaling increased risk premium for state borrowings.

 

State-Level Borrowing Patterns

 

States continue to rely on SDLs to bridge fiscal gaps and fund infrastructure, welfare, and development programs. The current auction reflects a mix of strategies:

 

- Telangana and Bihar opting for ultra-long tenures to lock in rates  

- Tamil Nadu and Maharashtra focusing on 10-year benchmarks  

- Chhattisgarh and Gujarat maintaining conservative yield profiles  

- Kerala and Rajasthan pricing at the higher end of the curve  

 

The diversity in yields and maturities underscores the varying fiscal positions and market perceptions of individual states.

 

Bond Market Outlook

 

With SDLs offering higher yields than central government securities and minimal credit risk, they remain a preferred instrument for institutional investors. As fiscal pressures mount and infrastructure spending accelerates, SDL issuances are expected to rise in the coming quarters.

 

States may continue to explore longer tenures to manage refinancing risks, while investors will monitor macro indicators, RBI’s liquidity stance, and fiscal discipline for pricing decisions.

 

Sources: Financial Express, BondsIndia, Enrich Money SDL Tracker.