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1. RBI- A Full Service Central Bank 1.1 Cash and debt manager of Govt.

: national and subnational The Constitution of India gives the Executive Branch the powers to borrow upon the security of the Consolidated Fund of India or that of the respective State within such limits as may from time to time be fixed by Parliament or by the respective State Legislature by law. Under Section 17 (11) of the RBI Act 1934, the RBI is acting as an agent of the Central and State Governments for the management of public debt. Under Section 20 of the RBI Act, it is an obligation of the Bank to transact Government business including the management of public debt of the Union Government. Under Section 21, the Bank has the right to transact Government business in India. Under Section 21 (2), the Central Government has to entrust the Bank with the management of the public debt and with the issue of any new loans, on such conditions as may be agreed upon. Under Section 21 A, the RBI may undertake public debt management of State Governments by entering into an agreement. The Bank has established a Primary Dealer (PD) system for government securities, which are regulated by the Bank under Chapter III B of the RBI Act as applicable to non-banking institutions. The procedural aspects in debt management operations used to be governed by the Public Debt Act, 1944 and the Public Debt Rules framed thereunder. Such procedural aspects including the back office functions of public debt management are now governed by the Government Securities Act, 2006. The Internal Debt Management Department (IDMD)of the RBI conducts auctions for raising market loans, formulates calendar for primary issuance, decides the maturity profile of debt, designs the instruments and methods of raising resources, taking into account government's needs, market conditions, and

preferences of various segments, while ensuring that the entire strategy is consistent with the overall monetary policy objectives. The transactions connected with the public debt are decentralised and carried out in 14 regional Public Debt Offices (PDOs). They manage the registry and depository functions, including repayment and servicing functions, and keeping securities accounts

. it is further complemented by regular discussions between the Ministry’s Budget and Expenditure Divisions and the RBI.000 crore (Rs. 1934. 2. powers have been delegated to the RBI for regulating government securities. Decisions on the implementation of the borrowing program. As per Section 45W of the RBI Act. Under Section 3 (1) of the Payment and Settlement Systems Act. based on proposals made by the IDMD and market preference. or other instruments of like nature as the Bank may specify from time to time.including the book entry form of ownership. the RBI is the designated authority for the regulation and supervision of payments system in India barring stock exchanges or the clearing corporations of stock exchanges which are under the regulatory purview of the SEBI. gold related securities. accordingly. was used through desequestering to partly fund the GFD alleviating pressure on fresh govt borrowings. in public interest or to regulate the financial system of the country to its advantage. to determine the policy relating to interest rates or interest rate products and give directions in that behalf to all agencies or any of them. 2007. derivatives.2 Regulator of financial markets / products As per the notification of March 1. The central accounts are maintained by Department of Government and Bank Accounts. securities derived from these securities and repo contracts. 2000 of the Government of India issued under the Securities (Contracts) Regulation Act (SCRA). foreign exchange. money market instruments. which is primarily used by the Central Bank for managing enduring nature of liquidity in the system especially liquidity infused by capitals flows. 120 billion) was. are periodically taken by the Cash and Debt Management Committee of the Ministry of Finance (MoF) and the RBI. dealing in securities. The trading in Government securities on stock exchanges is regulated by the Securities and Exchange Board of India (SEBI). 12. money market securities. 1. the Bank has the power. While this represents a formal working relationship between the MoF and the RBI. Debt Management during Crisis RBI’s unique experience  MSS : The Market Stabilisation Scheme (MSS). An amount of Rs.

2301 crore). 280 billion) was de-sequestered from the MSS cash account in May 2009 against the approved market borrowing programme for 2009-10. 28. Further.59 years as on end-March 2008) and this provided an opportunity to the debt manager to shorten the weighted maturity for lowering effective borrowing cost without compromising rollover risk.  Shortening of maturity: India had sufficiently long weighted average maturity of the outstanding public debt (i. contributing to financing 21.transferred from the MSS cash account to the regular cash account of the Central Government in March 2009.  The monetary policy maintaining appropriate liquidity in the system also helped debt management policy to complete such a large Govt borrowing programme in a non-disruptive manner in 2008-09 and 2009-10. debt managers in consultation with Central Government resorted to usage of Treasury bills to partly fund the increased GFD. The Reserve Bank responded by injecting liquidity in the system through conventional OMO.000 crore (Rs. 10. an amount of Rs.3 per cent of GFD (as per the revised estimates) as against a negative contribution of 1.e.564 crore. 561. it was difficult to fund the large increase in gross fiscal deficit (GFD) entirely through dated securities during 2008-09. Thus. but the timing of the unwinding could also be modulated in such a way that the large borrowing programme of the government was managed smoothly without exerting undue market stress.000 crore (Rs. unwinding of MSS balances and CRR reduction. 5610 billion) up to September 2009. The unwinding of MSS balances not only created scope for adequate liquidity expansion by the Reserve Bank without expanding its balance sheet in any significant measure. Accordingly. The cumulative impact of the various liquidity measures put in place since mid-September 2008 augmented actual/ potential liquidity in the system on the aggregate by Rs. The net issuances of Treasury Bills during 2008-09 amounted to Rs. 69. the weighted average maturity of the dated securities issued during 2008-09 and 2009-10 was shortened. provision of liquidity through repos and term repos under LAF.  Reliance on T Bills : As issuance of Govt dated securities was already bloated.8 per cent to GFD financing in 2007-08 (-Rs. which in turn helped in .

by reducing their portfolio duration. However.62 years in 2010-11 from 11.  Multiple Calendars: The gross market borrowing programme of the Central Government (dated securities and 364-day Treasury Bills) was about 181 per cent of the budget estimate for 2008-09 and the net borrowing. the weighted average yield was lower than in 2007-08. The weighted average cost of market borrowings moved upwards up to August 2008 but decelerated subsequently. another emerging market (EME).Sec on a back to back basis to Open Market Purchase : Brazil. In view of this. Due to higher than expected borrowing programme by both the Central and the State Governments. also faced challenges in sovereign debt management during crisis.  The feedback from the banks and PDs indicated that floating rate bonds (FRBs). about 210 per cent of the budget estimates. exposure limit of FIIs in Govt bonds has been enhanced from US$ 5 billion to US$ 10 billion recently. For the second half. up to January 2009. Treasury effectively conducted simultaneous buyback and sell auctions of bonds and these interventions were quite successful in stabilizing yield immediately. which became necessary to meet the additional expenditure approved under supplementary demands for grants. the weighted average cost of borrowings moderately increased thereafter.moderating somewhat the weighted average yield on the dated securities issued during this period. There was an upward spike in yield of Govt bonds as foreign investors sold off these bonds. In India. The measures undertaken by Reserve Bank of India to make available sufficient liquidity in the system helped in containing hardening of yields. three additional calendars were issued in supersession of the scheduled issuance calendar. though. The average maturity increased to 11. however. For the year as a whole. we also witnessed some upward spike in yield of Govt bonds on account of liquidity tightening.  Issuance of G. the auctions for dated securities were broadly in accordance with the relevant issuance calendar. and not because of sell off pressure from foreign investors as their exposure in Govt bonds remain insignificant. could insulate investors from the . During the first half of the year. largely reflecting the pattern in monetary policy rates. resulting from large scale capital flow reversals.16 years in 2009-10.

imparting an element of predictability in SDL issuance. management of State debt. private credit off-take. after a gap of 5 years. avoiding bunching of issuances.interest rate risk and enable them to undertake asset liability management in a more effective manner. 2009.  In India. bringing down the spread to 45 bps in 2010-11 from 86 bps in 2009-10. So. meetings. FRBs were reissued on January 25 and April 26.  SDL bunching : Keeping in view the requirements of cash management. SDL auctions are now being carried out once in a fortnight. It may be pointed out that PDs played a vital role in successful completion of large increase in Govt borrowings during the crisis period. Bunching of SDL issuances in the fourth quarter of 2008-09 in pursuance of counter-cyclical measure in the wake of global financial crisis resulted in higher cost of borrowing as reflected in higher spread of 236 bps over and above the comparable GoI dated securities yield. a bi-monthly meeting with PDs and other market participants was started. and thereby enabling build up of liquidity. the Reserve Bank. publications to assess their requirements as well as to inform them about evolving circumstances and policy decisions. PDs underwrite 100 per cent of the notified amount of Govt dated securities and they are paid commission for this. primary dealers (PDs) are committed to underwrite minimum 50 per cent of the notified amount and additional 50 per cent of notified amount is underwritten by them through auction. Accordingly. permitting re-issuance of FRBs. Subsequently. It was also felt that the FRBs could turn out to be cost effective for the Government vis-à-vis fixed rate bonds. Subsequently.  SDL spread: . The product design of FRBs was changed in consultation with the market participants. issued 11-year FRBs on December 21. 2010. For instance. the issuances of SDLs were spread across the year evenly. etc.  Reserve Bank as a debt manager increased the communication with market participants through press releases. While efforts are currently on towards designing an SDL calendar. the borrowing calendar of GoI has generally planned to raise 60% or more of the annual market borrowing in the first half of the financial year.

issued three additional indicative calendars on December 5. in consultation with the Central Government. The issuances were largely in accordance with the calendar for the first half of the year. However.000 crore and of which about 84 per cent has been raised successfully so far.16. 273.06. which was aimed at carrying forward fiscal consolidation path set in over the last few years.000 crore. significantly higher (about 83 per cent) than the budget estimates. The gross market borrowing of the GoI was estimated at Rs. 118. January 6.1.000 crore more than the amount indicated in the issuance calendar.  The aggregate amount raised during the first half of 2008-09 (April-March) was Rs.780 crore (Rs.47.000 crore (Rs.3. the Reserve Bank. Post Crisis challenge in debt management  Huge borrowing : The expansionary stance of the fiscal policy eventually resulted into higher govt market borrowings during 2008-09 and 2009-10. 2009 and accordingly. 4510 billion) during 2009-10 reflecting continued expansionary fiscal stance.138 crore (Rs.66 billion). . The auction schedule for the second half of 2008-09 was. The gross market borrowing further increased by around 65 per cent to Rs. 451.666 crore (Rs. which was Rs.000 crore additional (about 42 per cent total borrowing during 200809) was raised between December 2008 and March 2009. The subnational governments raised a gross amount of Rs. The gross market borrowings of the GoI for the current financial year (2010-11) are projected at Rs. 1497. 2736. It was really challenging for the debt manager to accomplish such a large Govt market borrowings programme in a non-disruptive manner especially in an environment of uncertainty and heightened risk aversion among investors in the backdrop of intensified volatility in financial markets. 2008. 149. actual Govt market borrowings during 2008-09 amounted to Rs. revised upward due to the increased demand for liquidity as well as the substantial increase in Government borrowings. 2009 and February 10.1.10. however. Due to the sharp increase in government spending and deceleration in tax revenues.  The borrowings of sub-national governments also increased by two-thirds approximately during 2008-09 as compared to 2007-08 as they also undertook counter-cyclical measures in the back of global crisis. 4.80 billion) in the Union Budget 2008-09. Rs.

as also for economic efficiency. Though this helped to reduce the risk as stated above. the RBI followed DvP-I mechanism wherein both securities and funds are settled on a gross basis (that is. despite an increase in borrowing requirements.1181. The smooth functioning of the market infrastructure for enabling payment and settlement systems is essential for market and financial stability. when this mechanism was first introduced. each transaction is settled individually). 1311. Accordingly. 131. 4. and for the smooth functioning of financial markets. managing the borrowing programme would be a challenge in view of tight liquidity conditions and high level of excess SLR holdings of the banks and nonavailability of MSS securities for unwinding.38 billion) from market during 2008-09. the sun-national governments completed their market borrowing of Rs. The settlement of government securities transactions in secondary market is being done on a Delivery versus Payment mechanism (DvP) (mechanism which helps to eliminate the risk that the seller will give out securities but not receive corresponding funds from the buyer and vice versa) in the books of RBI since 1995.    Need for streamlining SDL issuance Need for strengthening the PD system Need for continued coordination with monetary / liquidity policy : Notwithstanding the relatively lower budgeted market borrowings of the Central Government in 2011. the conduct of the market borrowing programme will be influenced by the ability of the Government to rein in the fiscal deficit and its financing by way of market borrowings at the budgeted level coupled with the monetary policy actions that anchor inflationary expectations. In July 1995. During 2009-10 also..122 crore (Rs. Development and regulation of financial markets / products      Plugging in regulatory gaps: Launching of new product with safeguards Reintroduction of IRF Information and transparency practices World class payment and settlement system: An efficient and well run payment system is sine-qua-non for the efficient functioning of any economy.e. The Clearing Corporation of India Limited (CCIL) which started its . defaults in settlement of SGL transactions.12. it still did not provide an arrangement whereby settlement failures did not take place i.22 billion) smoothly given the comfortable liquidity conditions in the market.

takes care of the risk of default to trading members mentioned above. The CCIL has in place risk management systems to limit settlement risk and operates a settlement guarantee fund (SGF) backed by lines of credit from commercial banks. Primary Dealers Association of India (PDAI) and Association of Mutual Funds of India (AMFI). additional $5 billion investment would in securities with residual maturity of over five years. acts as a central counterparty and provides guaranteed settlement of transactions in government securities to its members (all NDS members are members of CCIL). Since April 2. When CCIL and NDS were initially operationalised. The contributions to SGF are made by the members. situations of volatile outflows from the g-sec market would be pre-empted and therefore it will not lead to volatility in yields in the g-sec market. With CCIL stepping in to provide guarantee for settlement. The transactions in secondary market for government securities are obtained by CCIL from the NDS as well as the NDS-OM systems.operations along with NDS from February 15. 2004 the DvP-III mechanism is being followed whereby both securities (security-wise) and funds are netted. exposure limits calculated. the RBI is engaging them in a consultative process. margin contributions obtained from members and then net obligations of the members are arrived at by CCIL for both funds and securities. which acts as a clearing house for government securities transactions.  Self Regulation: Currently. the risk of settlement failures in government securities market has been mitigated to a great extent thereby providing further fillip to secondary market transactions. 2002. The securities obligations are settled at Mumbai PDO in the Securities Settlement System and the funds are settled in Mumbai DAD. FIMMDA and PDAI have served as crucial . These transactions are then cleared. the element of self regulation is provided in the market through the medium of Fixed Income Money Market and Derivatives Association of India (FIMMDA). Though there is no regulatory oversight of RBI over these SROs.  Enhanced FII limit in tune with Financial Stability : FII investment limit in G-Secs has been raised from $ 5 billion to $ 10 billion. Daily exposure limits are monitored and requirements for additional margin contributions from members are calculated by CCIL and obtained from respective members. The obligations for both funds and securities are then sent to RBI Mumbai for settlement under DvP mechanism. This helps to reduce liquidity requirements for settlement. This aspect of CCIL. The enhancement of FII limit in G-Sec would not lead to volatility in the g-sec market because the present policy would prompt the FIIs to invest in medium to long term g-secs and due to the provision of withholding tax on repatriation of interest income. the system of DvP-II mechanism was followed wherein securities were settled on a gross basis while funds were settled on net basis (setting off receipts and payments).

 . FIMMDA has been associated closely with RBI in bringing about uniform accounting practices for repos / ready forward contracts and master repo agreements used by participants. and have contributed to developing new benchmarks and products in addition to providing training and development support to the market participants. FIMMDA is also involved in the task of valuation of all Central Government securities.layers between the regulator and the market. They have formed guidelines for dispute resolution mechanisms and developed standard practices and codes of conduct for market players. Both FIMMDA and PDAI are represented in the Technical Advisory Committee of the RBI on Government Securities and Money Markets.