19 th OECD Global Forum on Public Debt Management Session II: Urgent Policy Challenges for Asian Debt Managers

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1 19 th OECD Global Forum on Public Debt Management Session II: Urgent Policy Challenges for Asian Debt Managers A Case Study of India A.K.Mitra

2 Structure Of Presentation I. Fiscal Situation II. Financing of Fiscal Deficit Role of Market Borrowings III. Policy Challenges in Debt Management IV. Financial Crisis -Instruments and Investors in Government Securities Market V. Recent developments in Infrastructure in Government Bond Market

3 I. Fiscal Situation

4 Year Table: Key Fiscal Indicators Before & During Crisis Table : Key Fiscal Indicators Primary Deficit Revenue Deficit Gross Fiscal Deficit (Per cent to GDP) Outstanding Liabilities* Centre States Combined

5 Debt-GDP Ratio Centre States Combined

6 II. Financing of Fiscal Deficit Role of Market Borrowings

7 Share of Market Borrowings in GFD Financing Centre States Total

8 Market Borrowings (per cent of GDP) Centre States Total

9 Share of General Government Borrowings to Savings Net Market Borrowings/Household Financial Savings GFD/Gross Domestic Savings

10 Rolling Targets for Fiscal Indicators (per cent to GDP) (RE) (BE) Revenue Deficit Fiscal Deficit Outstanding Liabilities

11 III. Challenges in Debt Management

12 Government Securities Market: A Snapshot Item Outstanding Market Loans (Rs. in billion) ,129 Outstanding Market Loans as ratio of GDP 13% 15% 25% 28% 26% 26% 26% 25% 28% Average maturity of the securities issued during the year (in Years) Weighted average cost of the securities issued during the year (%) Minimum and maximum maturities of stock issued during the year (in Years) N.A PD share in the secondary market turnover

Funds 1% FIIs 0% Provident Funds 7% Corporates 4% Primary Dealers 8%

13 Holder Profile in Central Govt securities as on end June 2009 RBI 11% Others 4% Financial Institutions 0% Co-operative Banks 3% Mutual Funds 1% FIIs 0% Provident Funds 7% Corporates 4% Primary Dealers 8% Commercial Banks 39% Insurance Companies 23% Source: RBI s Monthly Bulletin

14 Financing Fiscal Stimulus Dated Securities Calendar (Rs. billion) Variation (%) st Half nd Half Three addl. Calendars nd Half (total) From the Market MSS desequestering Total Net Borrowings

15 New issuances Out of 33 issues, one security (10-year) Out of 56 issues, 4 securities (one 6-year, two 10- year, and one 30-year) (up to November 9) Out of 81 issues, 6 securities (two 5-year, one 6- year, one 7-year, one 10-year and one 15-year)

16 Auction Format Central Government dated securities - switched to Uniform Price Auction (UPA) since March 26, 2009 Bid-cover ratio declined in partly reflecting market fatigue Sub-national issues and Treasury Bills continue to be on MPA basis

17 Deviation from Calendar 3 additional calendars issued during H2 to fund fiscal stimulus Maturity was lowered on a few occasions taking into account market conditions, particularly demand from commercial banks vis-à-vis insurance companies and pension funds

18 Bid-Cover Ratio

19 Yield and Turnover 25, , , ,000 5, ,0 5 Average Turnover Average 10-year Yield

20 10-year Yield

21 Yield Curve Mar Aug Oct-09

22 Cost of Borrowings - Centre

23 Nominal GDP Growth and Cost of Market Borrowings of Centre RoG GDPMP Weighted Avg. Rate of Interest on Centre's Market Borrowings

24 Yield and Maturity - Centre Weighted Average Yield declined for the 1 st time in 5 years in Issued during the Year Outstanding Stock WAY WAM WAY WAM ^ ^ up to October

25 Maturity Distribution Residual Maturity Less than 5 years years years years years & above Weighted Avg. Maturity

26 Operation of PDs 19 PDs in operation, of which 11 are banks Morgan Stanley India Primary Dealer Pvt. Ltd and Nomura Fixed Income Securities Pvt. Ltd. were given authorization to undertake Primary Dealership with effect from July 20, 2009 and September 7, 2009 respectively. Absorbed 42% of primary issues of Centre s dated securities in Turnover - outright at 18.7% (19.5% in 07/08) and repo at 11.2% (15.4%) for stand-alone PDs Underwriting shifted to PDs from RBI (post FRBM) Underwriting Commission paid to PDs increased After increasing to Rs.108 billion (4.1% of Rs.2,610 billion) in from Rs.9.6 billion (0.6% of Rs.1560 billion) in , devolvement on PDs declined to Rs.70 billion (2.1% of Rs.3,340 billion during up to Nov. 9)

27 Table: Comparison of underwriting cut-off fees accepted

28 Unconventional Measures MSS desequestering (Details in Session III) MSS buy-back (Details in session III) Open Market Operations (Details in session III)

29 IV. Instruments and Investors in Government Securities Market

30 Investments by FIIs Calculations about the sustainability of debt must also take into account more than just its size relative to GDP. As a rule, countries that issue debt in their own currency to their own citizens are less vulnerable than those that must sell bonds in foreign currencies or that depend heavily on foreign lenders. Emerging economies, which have usually borrowed from abroad, have often faced crisis with debt burdens of less than 60 % of GDP. (Economist, June 13, 2009) The time honoured principles for opening up of debt markets to foreign investment are (a) convergence in nominal and real interest rates on sustainable basis, (b) low debt/gdp ratio and (c) low fiscal deficit to GDP ratios on a consistent basis. India does not issue sovereign bonds abroad. Ceiling on FII investments in Rupee securities amount to 1.5 per cent of the outstanding stock of the Central Government securities (USD 5.0 billion in May 2008) Post crisis, the level of utilization as a proportion of limits decreased from 68. 9% as on 3 rd October 2008 to 35.8% as on 1 st May 2009 reflecting deleveraging by FIIs

31 Composition of Instruments of Market Borrowings: FRBs Entire market borrowings conducted through fixed coupon rupee securities during to (up to November 15) Fixed coupon rupee securities: 97.5% of outstanding stock FRBs - last issued in Outstanding share of FRBs: 2.5% Floating rate bonds will be issued this fiscal depending upon the market conditions and market appetite

32 V. Developments in Infrastructure of Government Bond Market

33 Auction Process of Government Securities Recent initiatives have improved the efficiency of the auction process by reducing the time taken for announcement of the auction results, thereby enhancing trading time The period for submission of competitive bids reduced to 2 hours (10-30 AM PM) and for non-competitive bids to 1 hour ( ) Facility of bidding in physical form has been withdrawn and submission of bids is only through the automated electronic auction platform in Negotiated Dealing System (NDS) Submission of a single consolidated bid on behalf of all its constituents by the bank/pd in respect of non-competitive bids, have been implemented with effect from May 22, 2009

34 Secondary Market reforms Trading Platforms OTC ( reporting on NDS) Electronic screen based anonymous order matching system NDS OM Enhance the trading efficiency Now covers all mandated entities Odd lot trading activated ( <5 cr) Gilt account route activated Retailing of Government securities

35 Process Flow Chart Clearing and Settlement of G Sec Transactions

36 Data Dissemination OTC trades (RBI website)

37 Data Dissemination Order Matching trades (RBI website)

38 Other Reforms DvP III settlement in government securities since 2004 FRBM precludes RBI from participating in primary auctions To make the auction successful, the markets needed to be more liquid, broad based and efficient Revamping the PD system Permitting short sale since 2006 Introduction of WI trading since 2006 Active consolidation STRIPS ( ) Interest rate swaps (1999) and IRFs (2003, revamped in 2009)

39 Thank You!

Y V Reddy: Developing debt markets in India review and prospects

Y V Reddy: Developing debt markets in India review and prospects Remarks by Dr Y V Reddy, Governor of the Reserve Bank of India, at a meeting of Central Bank Governors of Asia, Latin America and the Caribbean,