MUMBAI, Oct. 24 -- Flagging a sharp rise in state bond yields, the Reserve Bank of India (RBI) has cautioned states against pre-election populist spending and fiscal slippage, especially in Bihar and Maharashtra. At a meeting with state finance secretaries last month, RBI governor Sanjay Malhotra urged states to keep borrowing in check and adhere to fiscal deficit targets under the Fiscal Responsibility and Budget Management (FRBM) framework, four people aware of the matter said. The central bank's concerns were not reflected in a brief post-meeting statement, but have since gained urgency amid rising yields and expanding welfare commitments. The caution comes as market worries have deepened over the financial burden of populist schemes, the people cited above said on the condition of anonymity. "The governor emphasised on the importance of fiscal discipline for promoting economic growth and prosperity," the RBI statement on the 35th Conference of State Finance Secretaries had said on September 18. RBI is particularly worried about states that are simultaneously facing extended monsoon-related losses and pre-election spending pressures, according to two of the four people cited earlier. "Increased spending without commensurate revenue growth will push states to borrow more, and markets immediately price that in through higher yields," a third person aware of the development said, citing instances of fiscal strain in states such as Himachal Pradesh, Punjab, Uttarakhand, and Bihar. Last month, Bihar approved Mukhyamantri Mahila Rojgar Yojna, which promises Rs.10,000 in seed funding and up to Rs.200,000 in later stages to women for self-employment from every family in the state. Bihar legislative assembly elections are scheduled to be held in two phases on November 6 and 11. On October 7, Maharashtra announced a Rs.31,628 crore relief package for farmers affected by heavy rains and floods across the state. A rise in market borrowings and an uncertain global environment widened the spreads between 10-year benchmark government bonds and state development securities (SDLs) to 106-112 basis points in early September, significantly higher than historical spreads of 30-40 bps. While market borrowing by states announced on 3 October for Q3 at Rs.2.82 lakh crore, compared with expectations of Rs.3.2 lakh crore, narrowed the spread between SDLs and 10-year government bonds to 79-85 bps as of September-end, experts believe yields are only likely to rise from here. Currently, spreads are around 65-70 bps. "Overall, the fiscal health of all the states is reasonably good, but there are some states which put out optimistic fiscal deficit targets, which include grants from the centre, but when things don't pan out as planned, their fiscal deficit goes higher," said Paras Jasrai, associate director and economist, India Ratings & Research....