Impact on the corporate bond market: An internal study of RBI and CAFRAL had examined the impact of SDL spreads on corporate bond yields and it was observed that rise in yields on state government paper end up pushing spreads on corporate bonds. Unlike Central Government debt which crowds out bank credit, SDL crowds out corporate borrowings in the bond market by increasing costs.
A one percentage point increase in the ratio of state debt issuance to GDP, results in an 11 per cent decline in the volume (in Rupees) of corporate bonds issued in FY2016. High rated corporate bonds and those with longer maturity have a greater propensity for being crowded out by SDLs which work as substitutes. iii.