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Introduction
The importance of debt markets in growth of an economy is
well recognized.
State, which implies both the Government, the Central Bank &
other related Public Sector stakeholders, has a role to play in fostering a sound and diversified debt market, which efficiently performs the function of financial intermediation.
State intervention stabilized the financial system in recent
Brief History
States involvement in debt markets has a long history.
kings.
Initial purpose to finance wars later for civil purposes such as
Bonds Funds (ABF) has played a role in the development of the Government bonds market in the Asian region. years due to several initiatives by the Central Bank, Government and other stake holders.
Indian bond market has made rapid strides in the last few
Primary Issuances*
1,527 1,668 2,238 3,911 5,821 5,410
2008-09
2009-10 2010-11 2011-12
21,602
29,139 28,710 34,882
6,686 * - Gross for Central & State Govts. $ - Single side volume.
6
(Ratio)
0.52
0.39
India
Malaysia
Indonesia
Hong Kong
Singapore
Phillipines
Thailand
China
Japan
Korea
Secondary Market Activity in GoI Dated Securities Avg. tenor of Top security (yrs) 14 11 11 9 10 10 9 11 10
Year
Turnover Ratio
Top 5 securities Top security 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12
8
without causing sharp changes. Breadth - Diversity of participants and heterogeneity of their responses to new information. Width - Wider the bid-ask spread, the less the liquidity and vice-versa. Resilience - speed with which price fluctuations, due to some shock, finally dissipates.
Choice of instruments (e.g. fixed rate bonds, floating rate
bonds, inflation indexed bonds, zero coupon bonds, etc.) to cater to the varied requirements of market participants/ investors.
Deep, broad markets are generally more resilient and tend to
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Role of State
10
Role of State
Issuer of debt
Debt management strategy and framework .
instrument universe.
Regulator of bond market
Systemic stability market integrity consumer protection.
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State as Issuer
12
State as Issuer
State, generally largest issuer. State borrows due to mismatches in revenue and spending.
for market development (e.g. Australia, Norway, Hong Kong, Singapore, etc.). Reason: To nurture bond markets and develop benchmark yield curve. Debt Management Strategy (DMS), framework, funding instruments.
Credible DMS creates confidence for investors.
portfolio indicators, borrowing requirements, issuance strategy and liability management operations (buybacks and switches). 13 Provides requisite information and transparency,
State as Issuer2
Objectives of DMS: Cost minimization over medium term,
and portfolio indicators within the overall macroeconomic framework Debt sustainability analysis - Debt to GDP ratio, interest payments to revenue receipts ratio, rollover risk, etc. Benchmarks - Share of internal and external funding, shortterm debt, instrument-wise share, etc. Portfolio indicators - Duration, weighted average life, weighted average cost of borrowing, etc. Targets and risk limits for various benchmarks and portfolio indicators
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15
(Per cent)
90 80 70 60 50 40 30 20 10 0
1980-81 1982-83 1984-85 1986-87
1988-89
1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03
Interest/Revenue Receipts
2004-05
2006-07 2008-09 2010-11 0 1 2
Debt/GDP
(Per cent)
State as Issuer3
Borrowing
requirements - to be estimated based on projected budget deficits, and funding from other sources. Issuance strategy - periodic quantum, external and domestic funding, instruments, maturity structure, etc. Achieving a stable mix of borrowings in domestic and foreign currency India low level of debt denominated in foreign currency. Elongation of maturity to reduce rollover risk. Issuance of variety of instruments. Zero Coupon Bonds, STRIPs, Floating Rate Bonds, Inflation Index Bonds (proposed) To create Stable and Wide investor base Banks , Insurance companies, pension funds etc. Focus on Transparency Issuance calendar. Liability management operations Buybacks, switches.
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2001-02
42002-03
14.30
13.80
9.44
7.34
8.20
8.90
10.84
10.44
2003-04
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
17
14.94
14.13 16.90 14.72 14.90 13.80 11.16 11.62 12.66
5.71
6.11 7.34 7.89 8.12 7.69 7.23 7.92 8.52
9.78
9.63 9.92 9.97 10.59 10.45 9.82 9.78 9.74
9.30
8.79 8.75 8.55 8.50 8.23 7.89 7.81 7.88
2011-12
Composition of the Central Government's Public Debt 6.4 6.2 5.9 5.7 5.4 5.5
5.2
(% of Total)
2005-06
2006-07
2008-09
2009-10
2010-11
Internal Debt
18
External Debt
2011-12
2007-08
98
96
91
96
100
100
99
(Per cent)
2006-07
2007-08
2005-06
2008-09
2009-10
2010-11
19
2011-12
(% of Total)
Fixed
20
Floating
State as Issuer...4
Developing a benchmark yield curve Absence of a risk-free term structure of interest rates makes it difficult to price credit risk. It will be very difficult to establish a corporate bond market with credible benchmark yield curve. For building yield curve a program of regular issues at the appropriate maturities is required. India - large issuance of government securities to finance government budgets . Increasing share of market borrowings in GFD funding - from 21 per cent in 1991-92 to nearly 100 per cent in 2011-12 ensuring steady supply of securities to the market. The issuance volumes attaining critical mass to enable robust trading. Result: Risk-free yield curve up to thirty years comparable to peers in emerging markets; with regular auctions of 21 securities.
8.50
(Per cent) 8.40 8.30 8.20 8.10 8.00 7.90 7.80
22
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Maturity (Years)
Jun-12 Aug-12
State as Issuer...5
Benchmark yield curve in India - Kink at 10/11 years point and
few liquid points. 10 years benchmark is highly liquid and hence the demand for this segment. Major recommendation of the Working Group (Chairman: R. Gandhi) to improve liquidity in the G-Sec market: Consolidation with issuance of securities at various maturity points in conjunction with steps like issuance of benchmark securities over a longer term horizon, buybacks and switches. Specific market making obligations of the Primary Dealers. Simplification of access to G-Sec market for investors in retail and mid-segment, e.g. Trusts, PFs, cooperative banks, corporate, etc. Preparation of a roadmap to gradually bring down the upper-limit on the HTM portfolio. 23 Gradual increase in investment limit for FIIs in G-Sec.
State as Issuer6
Debt Management Framework Institutional Arrangements for Debt Management DMO vs. Central Bank as debt manager
Separation of debt management from Central Bank needs to
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preliminary assessment shows that most 29 principles have been broadly observed.
hedging. Widening the investor base Calibrated opening to foreign investors - promoting retail and mid-segment investors. Market access & efficiency Enabling issuers and investors easy access both the primary and secondary markets. Anonymous order-matching system with straight through processing (STP), web-based module for primary and secondary market, non-competitive segment for retail and mid-segment investors in primary auctions. Measures to enhance liquidity of bond markets, passive and active consolidation, among others- buybacks/switches building volumes in benchmark securities. Developing the related markets for funding/hedging 30 Money market, Repo market, Derivatives markets etc. In India, market repo, CBLO, IRF, IRS, etc.
17.6 47.3
0.9 1.4
7.3
Financial Institutions
Corporates
FIIs
0.3
0.3
21.2 0.1
31
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for balance sheets of the issuer (Govt), investors and the financial markets, through regulation and supervision. To focus on right regulation rather than more or less regulation. To strike balance between financial innovation & systemic stability- Responsible financialisation in sync with welfare enhancement goal. To ensure market integrity
Delivery versus Payments (DvP).
To
avoid market failures - Precluding any scope for asymmetric information. To put in place reporting and disclosure norms for ensuring requisite level of transparency. 33 To ensure consumer protection.
markets.
Market Integrity Limits on short-sales, yield bands for secondary market
transactions.
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3
Indian experience Market Surveillance Reserve Bank has created a regulatory reporting system which enhances transparency and improves disclosure (Trade Repositories for OTC derivatives, regulatory reporting of OTC outright and repo trades in G-sec in batch modes). Surveillance over cash and derivatives market for transactions, entities, prices and volumes. Ensuring Delivery-versus-Payments (DVP) Penalty for failure of settlement. Consumer protection Market participants are regulated entities which ensures market discipline Yields band Awareness 35 CCP for guaranteed settlement.
Conclusions
In conclusion, for development of deep, efficient & resilient
debt markets, each country has to focus on the role & responsibility of state (central bank and government) keeping in view:
Significance of debt markets, in particular government bonds
market, in overall economic development of the economy & the financial system even if a country has budget surplus. Credible and efficient debt management strategy and framework within the overall macroeconomic policy environment. Strategy for deeper, wider and resilient debt market. Safe and robust financial market infrastructure (FMI). Effective regulatory & supervisory framework focusing on financial stability, market integrity, transparency and consumer protection.
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Thank You
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