Recent Reserve Bank of India (RBI) auctions of 10-year State development loans (SDLs) have fetched cut-off yields of around 8.10 per cent. With semi-annual interest payments, that comes to an effective annualised yield of about 8.26 per cent. 1 SDLs are issued by State governments to meet their financing requirements and are sold through RBI-conducted auctions, with maturities from two to 40 years. If a State falls short on a payment, the dues can be adjusted against funds payable by the Centre to that State. 1
Supply is rising. RBI data show market borrowings by States and Union Territories for October-December 2026 at ₹3.61 lakh crore, 28 per cent above the ₹2.82 lakh crore scheduled for the same period last year. 1
Rate hike and spreads behind the SDL yields
The RBI raised the repo rate by 25 basis points on October 7 and changed its monetary policy stance. Another 25-basis-point hike in December is possible. 1 Clearing Corporation of India data as of October 29 put five-year SDL weighted average yields at 7.9 per cent, 10-year yields at 8.18 per cent and 15-year yields at 7.99 per cent. The weighted average spread between government securities (G-Secs) and SDLs was 61 basis points. The 10-year G-Sec yield is around 7.4-7.5 per cent. 1
Venkatakrishnan Srinivasan of Rockfort Fincap LLP says rising yields on AAA-rated corporate bonds have made them relatively more attractive than SDLs. That could compel State governments to offer higher yields. 1 He says crude oil above $110 per barrel could push yields higher. A sustained fall below $80, or easing geopolitical tension, could pull them down by 30-40 basis points. 1 The article adds that States with stronger fiscal profiles, such as Maharashtra, Gujarat and Tamil Nadu, generally find greater acceptance among institutional investors. 1
