Apart from the fact that the banks displayed an increasing reluctance to voluntarily invest in the State Government paper, the market had started discriminating amongst the States based on their perceived strengths and weaknesses; thus adversely affecting completion of the approved borrowing programme for the States.
The Central Government had switched over to the auction method for its open market borrowing programme since 1993 and in view of the experience described above, it was felt necessary for the State Governments to explore the possibility of adopting a flexible approach with regard to interest rate, maturity, etc., of their borrowings.