Public Debt Dated Securities and Treasury Bills Internal Debt External Debt Role of RBI in Managing Public Debt of Government of India and State Governments
Reserve Money (M0) = Currency in circulation + Bankers deposits with the RBI + Other deposits with the RBI = Net RBI credit to the Government + RBI credit to the commercial sector + RBI s claims on banks + RBI s net foreign assets + Government s currency liabilities to the public RBI s net non-monetary liabilities M1 M2 = = Currency with the public + Demand deposits with the banking system + Other deposits with the RBI. M1 + Savings deposits of post office savings banks M3 = M1+ Time deposits with the banking system. = Net bank credit to the Government + Bank credit to the commercial sector + Net foreign assets of the banking sector + Government s currency liabilities to the public Net non-monetary liabilities of the banking sector
Statutory Provisions
Constitution of India The Union Government and the State Governments have been empowered under Articles 292 and 293 of the Constitution of India to borrow money upon the security of the Consolidated Fund of India and the States within permissible limits. The Constitution also empowers the Union and the State Governments to give guarantees within such limits, as may be fixed. In case of Union Territories loans are advanced from the Consolidated Fund of India and repayments of such loans including interest, etc. to the Union Government are charged on the Consolidated Fund of respective Union Territories, as they have no power to borrow money directly from the market through RBI.
Article 292 of Constitution Article 292-Borrowing by the Government of India: The executive power of the Union extends to borrowingupon the security of the Consolidated Fund of India within such limits, if any, as may from time to time be fixed by Parliament by law and to the giving of guarantees within such limits, if any, as may be so fixed.
Article 293 of Constitution Article 293-Borrowing by States (1) Subject to the provisions of this article, the executive power of a State extends to borrowing within the territory of Indiaupon the security of the Consolidated Fund of the State within such limits, if any, as may from time to time be fixed by the Legislature of such State by law and to the giving of guarantees within such limits, if any, as may be so fixed (2) The Government of India may, subject to such conditions as may be laid down by or under any law made by Parliament, make loans to any State or, so long as any limits fixed under Article 292 are not exceeded, give guarantees in respect of loans raised by any State, and any sums required for the purpose of making such loans shall be charged on the Consolidated Fund of India
RBI Act, 1934 The essential legal framework for management of the public debt is provided by the Reserve Bank of India Act, 1934. Specifically, Sections 20, 21, 21A, 17(11), 17(5) of the RBI Act define the role of the Bank in managing public debt of the Central and State Governments.
RBI Act The Reserve Bank manages the public debt of the Central and the State Governments and also acts as a banker to them under the provisions of the Reserve Bank of India Act, 1934. While these functions become obligatory in the case of the Central Government (under the Sections 20 and 21), the Reserve Bank undertakes similar functions for the State Governments by agreement with the Government of the respective State (under Section 21 A).
Section 20. Obligation of the Bank to transact Government business The Bank shall undertake to accept monies for account of the Central Government and to make payments up to the amount standing to the credit of its account, and to carry out its exchange, remittance and other banking operations, including the management of the public debt of the Union.
Section 21. Bank to have the right to transact Government business in India (1) The Central Government shall entrust the Bank, on such conditions as may be agreed upon, with all its money, remittance, exchange and banking transactions in India, and, in particular, shall deposit free of interest all its cash balances with the Bank. (2) The Central Government shall entrust the Bank, on such conditions as may be agreed upon, with the management of the public debt and with the issue of any new loans.
Section 21A. Bank to transact Government business of States on agreement The Bank may by agreement with the Government of any State undertake (a) all its money, remittance, exchange and banking transactions in India, including in particular, the deposit, free of interest, of all its cash balances with the Bank; and (b) the management of the public debt of, and the issue of any new loans by, that State.
All State Governments, with the exception of Sikkim, have entered into agreements with the Reserve Bank for the purpose of both the aforesaid functions. Sikkim has agreements only for the limited purpose of the management of its public debt.
Section 17. Business which the Bank Section 17 (5) may transact the making to the Central Government and State Governments of advances repayable in each case not later than three months from the date of the making of the advance; Section 17 (11) the acting as agent for Central Government or any State Government in the management of public debt
Public debt
Public Debt In a broader sense, public sector debt includes debt incurred by all levels of Governments, Centre, State and local bodies as also Government owned entities. In a narrower and more pragmatic sense (since ownership of entities is getting diversified and changing), public debt refers to debt incurred by Centre, State and local Governments such as Municipalities.
Public Debt Often, when we talk of public debt-gdp ratio or fiscal deficit, we refer only to the debt of Central Government. State Governments do incur debt, but a large part is owed to the Centre and hence, this part will be netted out if we look at total public debt. Yet, because of decentralisation, implicit greater autonomy to States as well as market-orientation, management of public debt at State level is assuming greater importance.
The Union Government debt consists of three components namely, internal debt, external debtand other liabilities. Similar debt structure exists in case of State Governments also. Internal debt and external debt constitute public debt of the Union Government and are secured under the Consolidated Fund of India.
Internal Debt Internal debt of the Union Government includes Market Loans, Special Securities issued to RBI and others, Gold Bonds, Compensation, Relief and other bonds, Treasury Bills of different maturities issued to the RBI, State governments, Commercial banks and other parties, WMA, Securities issued to International Financial Institutions, Marketable Securities and Special Union Government Securities issued against Small Savings. The internal debt is classified into market loans, other long and medium-term borrowingsand short-term borrowings and shown in the receipt budget of the Union Government.
External Debt External debt of the Union Government comprises both long term and short-term debt consisting of Multilateral and Bilateral borrowings by Government, etc.
Other Liabilities The liabilities other than internal and external debt include other interest and non-interest bearing obligations of the government, such as Post Office savings deposits, deposits under small savings schemes, loans raised through Post Office cash certificates, Provident funds, interest and non-interest bearing reserve funds of departments like Railways, Telecommunications and others. The other liabilities of governments figure in government s accounts more in its capacity as a banker rather than as a borrower.
History of Public Debt
History of Public Debt The provisions of the Reserve Bank of India Act, 1934 authorizes the RBI to grant advances to the Government, repayable not later than three months from the date of advance. These advances, in principle, were to bridge the temporary mismatches in the Government s receipt and expenditure and were mainly intended as tools for Government s cash management.
History of Public Debt However, in practice, the tool of short-term financing became a permanent source of funds for the Government through automatic creation of ad hoc Treasury bills whenever Government s balances with the RBI fell below the minimum stipulated balance. This automatic monetization led to the RBI s loss of control over creation of reserve money.
History of Public Debt In addition, the RBI also created additional ad hoc Treasury bills whenever funds were required by the Government. As there was unbridled expansion of fiscal deficits and the Government was not in a position to redeem the ad hoc Treasury bills, the RBI was saddled with a large volume of these bills constituting a substantial component of monetized deficit. This process continued from the 1950s to the 1990s. Until 1994-95, the needs of Government were accommodated through automatic monetisation by issuing ad hoc Treasury Bills at 4.6 %.
History of Public Debt By the end of the 1980s a fiscal-monetaryinflation nexus was increasingly becoming evident whereby excessive monetary expansion on account of monetization of fiscal deficit fuelled inflation The Central Government entered into an agreement with the Reserve Bank in 1994 to phase out the system of automatic monetisation of budget deficit through creation of ad hoc Treasury Bills within a period of three years.
History of Public Debt Accordingly, the system of deficit financing through the creation of ad hocswas abolished with effect from April 1, 1997. Under a new arrangement, a Ways and Means Advances(WMA)scheme was introduced to facilitate bridging of temporary mismatches in the Central Government's cash flows. The participation by the RBI in primary auctions of the Government has also been discontinued with effect from April 1, 2006 under the provisions of Fiscal Responsibility and Budget Management Act, 2003 (FRBM).
Operational Procedure
Internal Debt Management Department of RBI The main activity of the Internal Debt Management Department is to manage the public debt of Government of India/ State Governments. The Department also regulates and supervises the Primary Dealers System and has the responsibility for development of Government Securities Market.
Internal Debt Management Department (IDMD) of RBI The activities of IDMD involve: (i) Floatation of Central/State Government Loans preparation of calendar for issuances of Government of India dated securities and Treasury Bills, introduction of new instruments for Government s market borrowings; (ii) Fixing of limits on Ways and Means advances (WMA) for both Central and State Governments and monitoring the use of these limits on a daily basis;
Internal Debt Management Department (IDMD) of RBI (iii) Authorisation, regulation and supervision of the Primary Dealer system; (iv) Market development activities like the introduction of new instruments, development of trading platform, clearing and settlement systems and widening of investor base; (v) Facilitating State Governments' investment of their surplus cash balances in Treasury Bills and dated securities under various funds.
IDMD The IDMD in consultation with the Ministry of Finance, Government of India formulates half yearly/ annual calendar for primary issuance of the dated securities and the treasury bills; decides the size, timing and maturity of issuances and conducts auctions, taking into account the government s needs, market conditions and preference of various investor segments.
Borrowings by the State Governments The limit of borrowings for each State is given by the Government of India at the beginning of the year. The Reserve Bank in consultation with the respective State Governments and Government of India decides on the timing, tenure and notified amount of State Development Loans (SDLs) keeping in view the borrowing requirements of the State Governments and market conditions. Since 2006-07, the market borrowings of State Governments have also been conducted entirely through auction method.
Ways and Means Advances The RBI acts as the banker to the Government and provides WMA facility to the Centre and the States. The limit of WMA in respect of the Centre is fixed in consultation with the Government of India on an annual basis. The allocation of WMA limits among States is determined taking into account the recommendations of the Advisory Committee on Ways and Means Advances and Overdrafts to the State Governments.
Government Security Dated Securities and Treasury Bills
Government Security A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securitieswith original maturity of one year or more). The Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). Government securities carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.
Government Security Government of India also issues savings instruments (Savings Bonds, National Saving Certificates(NSCs), etc.) or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR securities.
Treasury Bills (T-bills) Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued by the Government of India Presently issued in three tenors, namely, 91 day, 182 day and 364 day. Zero coupon securities -pay no interest. They are issued at a discount and redeemed at the face value at maturity. The 91 day T-bills are auctioned on every Wednesday. The Treasury bills of 182 days and 364 days tenure are auctioned on alternate Wednesdays. T-bills of 364 days tenure are auctioned on the Wednesday preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a non-reporting Fridays.
Cash Management Bills (CMBs) A new short-term instrument, known as Cash Management Bills(CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity Investment in CMBs is also reckoned as an eligible investment in Government securities by banks for SLR purpose First set of CMBs were issued on May 12, 2010.
Dated Government Securities Dated Government securities are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually halfyearly). The tenor of dated securities can be up to 30 years.
Dated Government Securities The nomenclature of a typical dated fixed coupon Government security contains the following features - coupon, name of the issuer, maturity and face value. For example, 7.49% GS 2017 would mean: Coupon : 7.49% paid on face value Name of Issuer : Government of India Date of Issue : April 16, 2007 Maturity : April 16, 2017 Coupon Payment Dates : Half-yearly (October 16 and April 16) every year Minimum Amount of issue/ sale : Rs.10,000
Dated Government Securities In case there are two securities with the same coupon and are maturing in the same year, then one of the securities will have the month attached as suffix in the nomenclature. For example, 6.05% GS 2019 FEB, would mean that Government security having coupon 6.05 % that mature in February 2019 along with the other security with the same coupon, namely,, 6.05% 2019 which is maturing in June 2019.
Dated Government Securities: Instruments Fixed Rate Bonds These are bonds on which the coupon rate is fixed for the entire life of the bond. Most Government bonds are issued as fixed rate bonds. For example 8.24% GS 2018 was issued on April 22, 2008 for a tenor of 10 years maturing on April 22, 2018. Coupon on this security will be paid half-yearly at 4.12% (half yearly payment being the half of the annual coupon of 8.24%) of the face value on October 22 and April 22 of each year.
Dated Government Securities: Instruments Floating Rate Bonds Floating Rate Bonds are securities which do not have a fixed coupon rate. The coupon is re-set at pre-announced intervals (say, every six months or one year) by adding a spread over a base rate. In the case of most floating rate bonds issued by the Government of India so far, the base rate is the weighted average cut-off yield of the last three 364- day Treasury Bill auctions preceding the coupon re-set date and the spread is decided through the auction. Floating Rate Bonds were first issued in September 1995 in India.
Dated Government Securities: Instruments For example, a Floating Rate Bond was issued on July 2, 2002 for a tenor of 15 years, thus maturing on July 2, 2017. The base rate on the bond for the coupon payments was fixed at 6.50% being the weighted average rate of implicit yield on 364-day Treasury Bills during the preceding six auctions. In the bond auction, a cut-off spread (markupover the benchmark rate) of 34 basis points (0.34%) was decided. Hence the coupon for the first six months was fixed at 6.84%
Dated Government Securities: Instruments Zero Coupon Bonds Zero coupon bonds are bonds with no coupon payments. Like Treasury Bills, they are issued at a discount to the face value. The Government of India issued such securities in the nineties, It has not issued zero coupon bond after that.
Dated Government Securities: Instruments Capital Indexed Bonds These are bonds, the principal of which is linked to an accepted index of inflation with a view to protecting the holder from inflation. A capital indexed bond, with the principal hedged against inflation, was issued in December 1997. These bonds matured in 2002. The government is currently working on a fresh issuance of Inflation Indexed Bonds wherein payment of both, the coupon and the principal on the bonds, will be linked to an Inflation Index (Wholesale Price Index).In the proposed structure, the principal will be indexed and the coupon will be calculated on the indexed principal.
Dated Government Securities: Instruments Bonds with Call/ Put Options Bonds can also be issued with features of optionalitywherein the issuer can have the option to buy-back (call option) or the investor can have the option to sell the bond (put option) to the issuer during the currency of the bond. 6.72% GS 2012 was issued on July 18, 2002 for a maturity of 10 years maturing on July 18, 2012. The optionalityon the bond could be exercised after completion of five years tenure from the date of issuance on any coupon date falling thereafter. The Government has the right to buyback the bond (call option) at par value (equal to the face value) The investor has the right to sell the bond (put option) to the Government at par value at the time of any of the half-yearly coupon dates starting from July 18, 2007.
State Development Loans (SDLs) State Governments also raise loans from the market. SDLs are dated securities issued through an auction similar to the auctions conducted for dated securities issued by the Central Government. Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date. Like dated securities issued by the Central Government, SDLs issued by the State Governments qualify for SLR.