Steps Towards Securities Market

By: Anthony Green

The guiding objectives in the development of the government securities market have been to develop a smooth yield curve, to create a suitable benchmark for pricing of various debt instruments and to enable use of indirect instruments for the operation of monetary policy. The significant steps taken towards deepening and widening of the government securities market during 2001-02 include elongation of maturity profile of outstanding securities, development of benchmarks by consolidating new issuances in key maturities, enhancing fungibility and liquidity through consolidation by reissue of existing loans, promoting retailing of government securities and re-introduction of Floating Rate Bonds. The development of key benchmark securities in the Indian gilt market is in line with international best practices with the 10-year government security evolving as a benchmark, as in several developed countries. Primary Market The issuances of government dated securities are normally concentrated in the first half of the year. In 2001- 02, more than two thirds of the issuance was raised during the first half of the year with Rs. 28,000 crore or 24.5 per cent of total issuance raised in April 2001. To encourage retail participation, in particular amongst the mid-segment investors in the primary market for government securities, the Reserve Bank implemented a scheme of Non-Competitive Bidding with provision for allocation of up to 5 per cent of the notified amount in specified auctions of dated securities for allotment to retail investors on a non-competitive basis at the weighted average rate. The scheme was operationalised from January 14, 2002 with the auction of 15-year Government stock The Floating Rate Bond (FRB) was reintroduced on November 21, 2001 with a 5-year maturity issue for a notified amount of Rs.2000 crore. On December 5, 2001, another FRB with maturity of 8 years for notified amount of Rs.3,000 crore was auctioned. Later in July 2002, a 15 year-FRB for a notified amount of Rs.3,000 crore was floated. The interest rate on these bonds is calculated by adding a fixed spread over a variable base rate. The base rate is the average of the implicit yields arising at the immediately preceding six auctions of 364-day Treasury Bills, prior to the relative half-year coupon period. The interest rate is reset every six months. The issue of 14-day and 182-day Treasury Bills was discontinued with effect from May 14, 2001. The notified amount of 91-day Treasury Bill auctions was increased from Rs.100 crore to Rs.250 crore from May 18, 2001 and dates of payment were synchronised with the dates of payment of 364-day Treasury Bills to provide a fungible stock of Treasury Bills of varying maturities and to activate the secondary market.
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