Even banks investing in SDLs are averse to trading because of the valuation norms which facilitate nudging up of the price of SDL in banks’ books and insulation from market risks offered by HTM dispensation. With an objective to ensure banks’ bond portfolios reflect their current market valuation, it has been decided that the SDLs should be valued based on observed prices.
This measure could potentially discourage passive investment by banks and improve trading volumes in SDL. The market is also devoid of market-makers providing two-way quotes, thereby impacting liquidity. Risk asymmetry in SDLs Following the recommendations of the 12th Finance Commission, government disintermediated from the borrowings of State Governments from FY06 onwards.