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State Development Loans Index – Investibility Issues

Federal States in India issue bonds to raise resources from the market to fund the developments in the States. Though sovereign, these States raise money through issuance of State Development Loans (SDL) at a rate which is typically 40-50bps higher than the rate at which the Government of India raises money from the market. Unlike Government of India, States generally do not have well defined issuance calendar and do not follow passive consolidation through reissuance. Many small issues dominate the market and secondary market for these securities is extremely illiquid. Trading in secondary market is concentrated in recently issued securities and very little liquidity exists in old securities. Given the structure, developing an SDL Index is challenging. Performance of the said index vis-a-vis the comparable securities is studied in this paper in order to understand the investibility of the SDL index.