(Refiles to fix typo in headline)
By Neha Dasgupta and Suvashree Dey Choudhury
MUMBAI, April 22 India's central bank is
discussing ways to ensure an orderly rollout of its unpopular
proposal to price state government debt at market-based
valuations to minimise potential losses for banks holding this
debt, three officials familiar with the discussions told
Holders of state debt - which are largely made up of banks -
could be pushed to mark them to market prices in several stages
as opposed to in one go, the officials said, although they noted
the Reserve Bank of India (RBI) has not yet decided whether it
will implement the proposal.
The officials added the central bank is also considering
adopting a uniform pricing method used for government bonds to
sell state debt. Under this method, debt is allocated to bidders
at the same prices and is considered to be less volatile.
"There is a talk going on to implement the valuation rules
in tranches," one official told Reuters, adding that such a step
will help banks limit the losses on their existing state debt.
All officials declined to be identified because they were
not authorised to speak to the media.
The RBI did not have an immediate comment.
The RBI in February proposed to scrap a 14-year old system
that allows banks to value state debt at a fixed spread of a
quarter-percentage point over government bonds, which had given
more certainty to issuers and investors, but raised worries that
it did not properly reflect the pricing of state credit.
Investors and state issuers are not keen to switch to
market-based valuations, fearing big losses on their portfolios.
Yet the officials dismissed these market concerns, saying
that state debt should not be priced too far above government
debt given they share a sovereign guarantee.
Still, policy makers are proceeding cautiously, especially
as government bonds have been volatile because of concerns of a
sizeable 6 trillion rupees ($99.21 billion)in gross borrowing
scheduled to hit markets in the April to March fiscal year.
The central bank also plans to sell around 500 billion
rupees of debt on behalf of states during April to June,
including 84.16 billion rupees later on Tuesday.
The RBI will consult the Fixed Income Money Market And
Derivatives Association Of India before adopting any decisions,
the sources said, and is due to hold further discussions with
state government officials early next month.
"State governments are not comfortable paying such high
rates. It could have a negative impact on states for raising
money through market borrowings if the proposals are adopted,"
said an official at Tamil Nadu state.
($1 = 60.4750 Indian Rupees)
(Editing by Rafael Nam & Shri Navaratnam)