Archive · 28 Jan 2026
Mutual Funds Eye Higher SDL Allocation Amid Rising State Debt
Mutual fund companies in India are planning to invest more in State Development Loans (SDLs) because they offer higher returns compared to government bonds.
The difference in interest rates between SDLs and government bonds has increased, making SDLs more attractive.
The Reserve Bank of India (RBI) has noticed that many states in India are borrowing a lot of money, which is causing their debt to increase.
The RBI is trying to help by buying government bonds to add more money into the system.
However, the RBI is also worried because some states are spending too much money on things like farm loan waivers and free electricity, which could cause financial problems in the future.
The RBI suggests that states should find ways to earn more money and spend wisely.
Mutual fund houses plan to increase allocation in State Development Loans (SDLs) due to attractive spreads, with the spread between SDLs and G-Secs more than doubling to 85 basis points.
Kotak Mutual Fund aims to scale up SDL allocation to 20-30%, focusing on 2030-2035 maturities, while UTI Mutual Fund sees compelling opportunities in SDLs due to elevated issuance and illiquidity.
SBI Mutual Fund will focus on 10-year SDLs to balance yield pickup without shifting portfolio interest rate sensitivity.
The Reserve Bank of India (RBI) highlights that the consolidated gross fiscal deficit of states is at 3.3% of GSDP in FY26, the highest in the past decade, with 13 states budgeting for a fiscal deficit above 3.5% of GSDP.
RBI advances open market operation (OMO) purchase auctions of G-Secs to infuse liquidity aggregating ₹1 lakh crore, as the yield of the benchmark 10-year G-Sec jumps to an 11-month high of 6.72%.
- Who
- Mutual fund houses (Kotak, UTI, SBI), Indian States, Reserve Bank of India (RBI)
- What
- Mutual funds plan to increase allocation in State Development Loans (SDLs) due to attractive spreads, while RBI highlights rising state debt and advances OMO purchase auctions to infuse liquidity
- When
- Fourth quarter, with projections for FY26; OMO auctions advanced to January 29 and February 5, 2026
- Where
- India
- Why
- To capture higher yields due to attractive spreads between SDLs and government securities (G-Secs); RBI aims to address liquidity concerns and rising G-Sec yields
- SDL Spread
- 85 basis points
- 10-Year SDL Yield
- 7.5%
- 10-Year G-Sec Yield
- 6.72%
- Spread Between SDL and G-Sec
- 82 basis points
- Projected State Borrowings (FY26)
- Rs 12.5 lakh crore
- State Borrowings (Current Quarter)
- Rs 69,915 crore
- State Borrowings (Same Period Last Year)
- Rs 4.3 lakh crore
- Consolidated Gross Fiscal Deficit of States (FY26)
- 3.3% of GSDP
- Outstanding Debt of States
- 29.2% of GDP
