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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

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development of local currency bond markets the indian experience

Development of Local Currency Bond Markets:The Indian Experience

Shyamala Gopinath

Reserve Bank of India

March 6-7, 2007

London

outline of presentation
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
Structure of Bond Markets in India
  • Central Government Securities
  • State Government Securities
  • Corporate Bond Market
  • Securitised Debt
institutional arrangements with rbi
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
trends in centre s budget deficit
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
financing pattern of centre s gross fiscal deficit
Financing Pattern of Centre’s Gross Fiscal Deficit
  • Low Share of External Borrowings
  • Substantial Increase in Share of Domestic Open Market Borrowings
trends in government debt gdp ratio
Trends in Government Debt-GDP Ratio
  • Similar to the Trends in Budget Deficit
centre s fiscal responsibility act
Centre’s Fiscal Responsibility Act
  • Enactment of FRBM Act : August 26, 2003
  • Came into force from July 5, 2004
  • Elimination of RD by 2008-09 (3.6% in 2003-04) and revenue surplus thereafter
  • Containment of GFD to 3 % of GDP by 2008-09 (4.5% in 2003-04)
  • RD and GFD placed at 2.0% and 3.7% of GDP in 2006-07 (RE)
  • RD and GFD budgeted to decline to 1.5% and 3.3% of GDP in 2007-08
  • RBI prohibited from Participation in Primary Issuances of G-Secs
central g sec market pre reform period
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
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
  • Second Phase (1995-2000)
    • Institutional Development
      • DvP
      • Primary Dealers
      • FIMMDA and PDAI
    • Instrument Diversification
      • Floating Rate Bonds
      • Capital Indexed Bonds
reforms in the central g sec market cont d
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 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
snapshot of the central g sec market
Snapshot of the Central G-Sec Market
  • Increase in Stock and Turnover
maturity and yield
Maturity and Yield
  • Elongation of Maturity Profile
  • General Reduction in Weighted Average Yield
yield curve
Yield Curve
  • Development of a Smooth Yield Curve
external borrowings
External Borrowings
  • Low Share of External Debt
  • External Borrowings only from Multilateral and Bilateral Sources
measures to deal with external account pressures
Measures to Deal with External Account Pressures
  • India Development Bonds (IDBs) (1991): US$1.6 billion
  • Resurgent India Bonds (RIBs) (1998): US$4.2 billion
  • India Millennium Deposits (IMDs) (2000): US$5.5 billion
original sin
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
  • Issues
    • pros and cons of sovereign foreign currency borrowing
    • Rationale for calibrating foreign investment in domestic currency bonds
india s external debt
India’s External Debt
  • Cautious approach
  • Sovereign, corporates, financial intermediaries
  • Total External debt $132 bn as at end Sept 2006
  • Long-term debt $126 bn
  • Rise in external debt –ECBs, NRI, short-term
trends in budget deficit
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
financing pattern of fiscal deficit
Financing Pattern of Fiscal Deficit
  • Share of Central Loans has reduced
  • Share of Market Loans has increased since early 1990s
  • NSSF continues to predominate
fiscal reforms
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 2.7% in 2006-07
market borrowings of state governments
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 48.5% in 2005-06 and 2% in 2004-05 conducted through auctions
  • Auction calendar proposed to be issued by States
state government securities issues
State Government Securities - 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
corporate bond market29
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
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
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
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
    • Municipal Bonds, Mortgage Backed Securities, General Securitised Paper