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govt securities market.ppt

govt securities market.ppt

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Published by Rohit Bhardwaj
presentation on market in india
presentation on market in india

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Published by: Rohit Bhardwaj on May 08, 2013
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04/27/2014

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Development of Local Currency Bond Markets: The Indian Experience

Shyamala Gopinath Reserve Bank of India
March 6-7, 2007 London

Outline of Presentation
• Structure of Bond Markets in India • Institutional Arrangements with RBI • Central Government
    Trends in Budget Deficits and Debt Fiscal and Debt Market Reforms Impact of Reforms on the Debt Market Measures to Deal with External Account Pressures

• State Governments
 Trends in Budget Deficits and Debt  Fiscal and Debt Market Reforms  Issues in Development of State Government Securities

• Corporate Bond Market • The Way Ahead

Structure of Bond Markets in India
• Central Government Securities • State Government Securities • Corporate Bond Market • Securitised Debt

Institutional Arrangements with RBI • Banker and Debt Manager to Central Government by Statute • Banker to 26 State Governments and Debt Manager to 28 State Governments by Voluntary Agreements .

Central Government .

49 1.56 -0.06 2.76 Gross Fiscal Deficit Revenue Deficit Gross Primary Deficit 3.46 2.22 .07 5.56 5.1995.2004.2001.11 3.18 5.2005.50 0.64 6.60 0.200691 92 96 01 02 03 04 05 06 07 (RE) (BE) 7.26 4.14 0.01 4.49 2.86 4.1991.39 1.51 -0.2002.07 2.2000.2003.47 4.85 5.47 4.03 2.01 0.92 4.14 3.Trends in Centre’s Budget Deficit • Three Phases 1991-92 to 1996-97: Sharp Fiscal Correction 1997-98 to 2001-02: Deterioration 2002-03 onwards: Fiscal Correction Resumed 1990.93 4.40 1.

4 71.8 64.2004.5 49.9 32.7 35.9 0.2005.2 76.6 17.7 69.2001.4 17.1991.Financing Pattern of Centre’s Gross Fiscal Deficit • Low Share of External Borrowings • Substantial Increase in Share of Domestic Open Market Borrowings External Finance Market Borrowing Others Borrowing 1990.5 6.5 26.8 32.7 56.1 5.200691 92 96 01 02 03 04 05 06 07 (RE) (BE) 7.1 14.1995.3 4.2 42.9 20.2003.9 .8 5.2 -10.9 11.2000.0 15.0 54.5 45.4 61.1 40.2002.0 -8.8 72.

Trends in Government Debt-GDP Ratio • Similar to the Trends in Budget Deficit 90 80 70 60 50 40 30 20 10 0 1980-81 1990-91 1996-97 2000-01 2004.05 2006-07 (BE) Per cent Centre States Total .

2003 • Came into force from July 5.5% and 3.0% and 3.3% of GDP in 2007-08 RBI prohibited from Participation in Primary Issuances of G-Secs .Centre’s Fiscal Responsibility Act • Enactment of FRBM Act : August 26.5% in 2003-04) RD and GFD placed at 2.7% of GDP in 2006-07 (RE) RD and GFD budgeted to decline to 1.6% in 2003-04) • • • • and revenue surplus thereafter Containment of GFD to 3 % of GDP by 2008-09 (4. 2004 • Elimination of RD by 2008-09 (3.

Central G-Sec Market: Pre-Reform Period • Features – Administered and Low Interest Rates – High Statutory Liquidity Ratio (SLR) – Automatic Monetisation of Budget Deficit – High Cash Reserve Ratio (CRR) • Impact – Preemption of Financial Savings – No possibility of Price Discovery – Dormant Debt Market .

Reforms in the Central G-Sec Market • Three Phases • First Phase (1992-95) – Creation of Enabling Environment • Elimination of Automatic Monetisation • Introduction of Auctions • SLR reduced – Institutional Development • DvP • Primary Dealers • FIMMDA and PDAI – Instrument Diversification • Floating Rate Bonds • Capital Indexed Bonds • Second Phase (1995-2000) .

Reforms in the Central G-Sec Market (Cont’d) • Third Phase – Enhance Liquidity and Efficiency • Indicative Auction Calendar • Non-Competitive Bidding Facility • Liquidity Adjustment Facility • Repo and collateralised borrowing lending system • Negotiated Dealing System (NDS). STP and CCP • Interest Rate derivatives • Market Stabilisation Scheme • Foreign investment in local currency debt instruments • Conversion of special securities into marketable debt .

Reforms in the Central G-Sec Market (Concl’d) • Reforms undertaken in the context of FRBM Act – Functional Separation of Debt and Monetary Management: Creation of FMD – Extension of PD business to Banks – Revised Scheme of Underwriting by PDs: 100% Underwriting by PDs – NDS-OM – Short-Sale – When Issued market – Considering Active Consolidation .

94 2005 8.77 2-10 2002 5363 27.87 217.67 212.29 202.34 5-30 .71 4-30 6.9 14.44 5-25 2003 6739 27.8 7.21 5.3 14.13 2006 9. in billion) Outstanding stock as ratio of GDP (per cent) Turnover / GDP (per cent) Average maturity of the securities issued during the year (in Years) Weighted average cost of the securities issued during the year (Per cent) Minimum and maximum maturities of stock issued during the year (in Years) 1992 769 14.34 7-30 2004 8.953 28.78 N.767 27.Snapshot of the Central G-Sec Market • Increase in Stock and Turnover Outstanding stock (Rs.7 13.89 157.69 239.68 14.2 34.88 13.9 16.68 --11.3 9.A. 1996 1375 14.11 5-30 7.243 29.9 5.

• Elongation of Maturity Profile • General Reduction in Weighted Average Yield 18 16 14 Per cent / Years Maturity and Yield 12 10 8 6 4 2 0 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 Weighted Average Yield (per cent) Weighted Average Maturity (years) .

Yield Curve • Development of a Smooth Yield Curve 16 14 12 10 8 6 4 2 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Maturity (Years) Mar-97 Mar-04 Jan-07 Per cent .

Ownership Pattern of Central G-Secs • More Diversification Chart 5: Ownership Pattern of Central G-Secs: 1991 Reserve B ank o f Ind ia (o wn acco unt ) 0% 5% 1% 0% 13% 25% Co mmercial B anks Lif e Insurance Co rp o rat io n o f Ind ia # Unit Trust o f Ind ia NA B A RD Emp lo yees Pro vid ent Fund Scheme Co al M ines Pro vid ent Fund Scheme Primary d ealers 56% Ot hers 0% 0% 2% 0% 0% Chart 6: Ownership Pattern of Central G-Secs: 2005 16% 7% Res erve Bank of India (own account) Com m ercial Banks Life Ins urance Corporation of India # Unit Trus t of India NABARD 20% 53% Em ployees Provident Fund Schem e Coal Mines Provident Fund Schem e Prim ary dealers Others .

0 Per cent 60.0 1950-51 1980-81 1990-91 2000-01 2006-07 (BE) Domestic Liabilities External Liabilities .0 40.0 0.0 20.External Borrowings • Low Share of External Debt • External Borrowings only from Multilateral and Bilateral Sources 100.0 80.

Measures to Deal with External Account Pressures • India Development Bonds (IDBs) (1991): US$1.5 billion .6 billion • Resurgent India Bonds (RIBs) (1998): US$4.2 billion • India Millennium Deposits (IMDs) (2000): US$5.

Original Sin? • India – Low Share of External Liabilities in Sovereign Borrowing – Sovereign Borrowings only from Multilateral/Bilateral Sources – States not permitted to raise external debt directly – Foreign investment allowed in locaL currency bonds but within an overall ceiling – pros and cons of sovereign foreign currency borrowing – Rationale for calibrating foreign investment in domestic currency bonds • Issues .

corporates. shortterm .India’s External Debt • Cautious approach • Sovereign. financial intermediaries • Total External debt $132 bn as at end Sept 2006 • Long-term debt $126 bn • Rise in external debt –ECBs. NRI.

State Governments .

5 3.2001.68 0.23 2.89 2.93 1.2002.05 GFD Revenue Deficit Gross Primary Deficit 0.65 4.2004.78 0.54 2.69 0.1991.25 2.21 4.Trends in Budget Deficit • Strong Improvement since early part of this decade • Build up of Surplus Cash Balance in Recent Years: Buyback of Securities by some States 1990.61 -0.87 1.17 0.8 2.17 4.65 -2.49 0.2003.2005.22 0.75 -1.3 2.200691 92 96 01 02 03 04 05 06 07 (RE) (BE) 3.2000.09 -0.22 1.1995.46 3.03 -2.15 -0.47 .59 2.25 4.

2000.2 36.1 49.5 51.3 4.5 18.4 11.5 18.9 11.3 1990.9 34.2003.7 . Market Borrowing NSSF Others 33.2 21.2005.1991.1 2.8 12.2002.4 30.0 27.Financing Pattern of Fiscal Deficit • Share of Central Loans has reduced • Share of Market Loans has increased since early 1990s • NSSF continues to predominate Loan From Central Gov.0 32.2 37.4 -0.4 40.1 15.1995.9 33.0 53.7 14.200691 92 96 01 02 03 04 05 06 07 (RE) (BE) 53.6 47.2004.1 9.0 17.1 33.0 18.5 65.5 20.0 17.9 16.5 -15.2 66.7 21.2001.9 38.

7% in 2006-07 .Fiscal Reforms • Twelfth Finance Commission Fiscal Restructuring Plan: Fiscal Discipline Incentivised Enactment of FRL through Debt Consolidation and Relief Facility (DCRF) Financial Disintermediation by Centre • Experience FRL Enactment – 24 States RD to be nearly eliminated and GFD-GDP ratio to decline to 2.

5% in 2005-06 and 2% in 200405 conducted through auctions • Auction calendar proposed to be issued by States .Market Borrowings of State Governments • Till 1998-99: Tap Issuances • States encouraged to adopt auction route: – 100 % of market borrowing in 2006-07 so far as against 48.

issues • Negligible Secondary Market Liquidity – Low level of outstanding stock – Predominance of buy-and-hold investors – Disconnect between the uniform coupon fixed in tap issues and secondary market yield – Fragmentation across issuers and securities • Proposed Measures – Non-competitive bidding – Issuance calendar – Use for Liquidity adjustment facility .State Government Securities .

Corporate Bond Market .

Corporate Bond Market • Corporate Bond markets historically late to • • • • • • • develop Access to bank credit Access to external sources of finance Require well developed accounting legal and regulatory systems Rating agencies Rigorous disclosure standards and effective governance of corporations Payment and settlement systems Secondary markets .

Reforms in Corporate Bond Market • Four Rating agencies operating in India • De-materialisation and electronic transfer of securities • Initial focus – reform of private placement market by encouraging rating of issues • Further reforms needed • Appointment of a High Powered Committee .

High-powered committee recom • Enhance the issuer base and investor base including • • • • • • • • measures to bring in retail investors Listing of primary issues and creation of a centralized database of primary issues Electronic trading system Comprehensive automated trade reporting system Safe and efficient clearing and settlement standards Repo in corporate bonds Promote credit enhancement Specialized debt funds to fund infrastructure projects Development of a municipal bond market .

The Way Ahead • Build upon the Strong Macroeconomic Performance – Adherence to FRL – Stability of Inflation Rate -external debt management policy Pension reforms • • • • Active Consolidation Floating Rate Bonds and Inflation-Indexed Bonds STRIPS Corporate Bonds – Bond Insurance Institutions – Institutional Investors: Credit Enhancers – Securitised paper to be traded on exchanges .

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