Just like an individual, State Governments in India also run their budgets. Sometimes a state expenditure may shoot higher in these budgets than the revenue. This situation leads to a fiscal deficit. State Development Loans (SDL) is
a bond issued by state governments to fund this fiscal deficit. Each state can borrow up to a set limit. SDLs service their interest at half-yearly intervals and repay the principal amount on the maturity date. They are generally
issued for ten years.
The RBI manages these SDL issues. RBI also makes sure that the SDLs are serviced by monitoring payment of interest and principal.
But this does not mean that RBI guarantees SDLs. Like the government bond market, SDLs are also traded electronically. The participants mainly include banks, mutual funds, insurance companies, provident funds, and
others. Earlier, the daily traded volumes used to be less than 5% of government bond traded volumes. These are one of the most liquid instruments that can be bought and held for the long term. Sometimes spread may be higher than
the 10- year Government Bond. This rise is mainly due to interest rate outlook for the future, liquidity for investments, and appetite for such investments by institutions.