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Click here to return to main page of Annual Policy Statement 2006-07
Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2006-07
Financial Markets
Government Securities Market
119. The Reserve Bank has taken several structural and developmental measures for deepening and widening the Government securities market. In this direction, some of the recent initiatives are highlighted below:
(a) Central Government Securities Market
120. In the context of the significant changes underway in the setting and operating framework of monetary, debt management and regulatory policies of the Reserve Bank, a medium-term framework for the evolution of the Central Government securities market was proposed by the Reserve Bank’s internal technical group in July 2005. As a first step in pursuance of these recommendations, intra-day short-selling in Central Government securities was introduced with effect from February 28, 2006. Some additional measures proposed in this regard are:
(i) Introduction of ‘When Issued’ Market
121. In order to further strengthen the debt management framework, it is proposed:
• to introduce a ‘when issued’ (WI) market in Government securities. Guidelines covering permissible categories of securities and participants, surveillance system, limits on positions, internal control and reporting requirements have been prepared in consultation with market participants and are being issued separately.
(ii) Diversification of Primary Dealer Business
122. Primary dealers (PDs) have approached the Reserve Bank to permit them to diversify their activities for better risk management through generation of alternate streams of income. Based on a review, it is proposed:
• to permit PDs to diversify their activities as considered appropriate, in addition to their core business of Government securities, subject to limits.
The guidelines covering regulatory and prudential norms would be issued separately.
(iii) Expansion in Primary Dealer Business
123. It was announced in the Annual Policy Statement of April 2005 that the permitted structure of PD business would be expanded to include banks which fulfill certain minimum eligibility criteria. Accordingly, draft guidelines were put on the Reserve Bank’s website and taking into account the feedback received, guidelines have been issued in February 2006.
(iv) Revised Scheme for Underwriting Commitment and Liquidity Support to PDs
124. A revised scheme for underwriting commitment and liquidity support to PDs has been introduced with effect from April 1, 2006. Under the scheme, PDs are required to meet an underwriting commitment, replacing the earlier requirement of bidding commitment and voluntary underwriting.
The underwriting commitment is divided into two parts - minimum underwriting commitment (MUC) and additional competitive underwriting (ACU).
The MUC of each PD is computed to ensure that at least 50 per cent of each issue is covered by the aggregate of all MUCs. The remaining portion of the notified amount is open to competitive underwriting under ACU.In addition, liquidity support would be extended to stand-alone PDs. Of the total liquidity support, half of the amount would be divided equally among all the stand-alone PDs and the remaining half would be extended on the basis of their performance in the primary auctions and turnover in the secondary market.
(v) New WMA Arrangements for the Central Government
125. A revised arrangement for Ways and Means Advances (WMA) to the Government of India for the fiscal year 2006-07 is being put in place in consultation with the Government. As per the arrangement, the WMA limits would be fixed on a quarterly basis as against half-yearly as hitherto. The limits are placed at Rs.20,000 crore for the first quarter, Rs.10,000 crore for the second quarter and Rs.6,000 crore each for the third and fourth quarters. The Reserve Bank would retain the flexibility to revise the limits in consultation with the Government, taking into consideration the transitional issues and prevailing circumstances.
(vi) Consolidation of Central Government Securities
126. As indicated in the Annual Policy Statement of April 2005, there is a need to enlarge the number of actively traded Central Government securities in order to enhance liquidity and improve pricing in the market. Accordingly, it was proposed to consolidate and build up large volumes of liquid securities while continuing with the programme of reissuances. Identified illiquid securities will be bought from the secondary market by the Reserve Bank and once a critical amount of securities is acquired, they would be bought back by the Government to extinguish the stock. The modalities of consolidation are being worked out in consultation with the Government.
(b) Extension of NDS-OM Module to New Participants
127. In the Mid-term Review of October 2005, a screen-based order-driven anonymous NDS Order Matching (NDS-OM) Module was extended to all insurance entities for trading in Government securities. The Union Budget, 2006-07 announced the extension of the NDS-OM module to qualified mutual funds (MFs), provident funds and pension funds. Accordingly, it is proposed:
• to permit MFs, which are NDS members, to access the NDS-OM module with immediate effect. Other MFs would be permitted access by opening temporary current/SGL accounts with the Reserve Bank.
• to permit large pension/provident funds like CBOT/Seamens’/Coal Miners’ funds to access the NDS-OM module by opening temporary current/SGL accounts with the Reserve Bank. The smaller funds would be allowed access through the CSGL route.
These arrangements are being made on a temporary basis to enable immediate access to new participants to the NDS-OM module. Meanwhile, software is being developed to shift all entities, other than banks and PDs, which access NDS-OM from current accounts with the Reserve Bank to such accounts with commercial banks.
(c) Debt Management for State Governments
128. The following measures have been initiated by the Reserve Bank to strengthen debt management operations of State Governments:
(i) Auctions for Market Borrowings of State Governments
129. At present, State Governments have the discretion to issue securities by way of auctions, tap sales or a combination of both under the open market borrowing programme. During 2005-06, an amount of Rs.10,543 crore was raised through the auction route constituting 48.5 per cent of the total market borrowings of Rs.21,729 crore of State Governments. As the auction route promotes price discovery, maintains market discipline and contributes to improved secondary market liquidity, it is proposed that:
• State Governments may be encouraged to progressively increase the share of market borrowings under the auction route with a view to covering the entire market borrowings through auctions as early as possible.
(ii) Introduction of Indicative Calendar for Market Borrowings of States
130. The system of issuance of half-yearly indicative calendars for dated Government of India securities was introduced in 2002-03 to provide transparency and stability in the Government securities market and enable institutional and retail investors to plan their investments. The issuances of State Government securities, however, do not follow any such indicative calendar. It is now proposed that:
• States, at their discretion and initiative, would be encouraged to develop an advance indicative open market borrowing calendar.
(iii) Scheme for Investment Management of State Governments
131. At present, Consolidated Sinking Funds (CSFs) and the Guarantee Redemption Funds (GRFs) of State Governments are invested in Government securities held in the books of the Reserve Bank. The Twelfth Finance Commission (TFC) recommended that all States should set up sinking funds for amortisation of all loans (and not just market borrowings) and continue to maintain the Calamity Relief Fund (CRF) in its present form. In the context of these developments and for management of investments of State Governments, it is proposed:
• to revisit the scheme of CSF to cover the entire liabilities of State Governments and not just open market borrowings as at present.
• to prepare a scheme of CRF in consultation with the Government.
(iv) WMA/Overdraft Scheme for State Governments
132. As indicated in the Mid-term Review of October 2005, the Advisory Committee on Ways and Means Advances to State Governments (Chairman: Shri M.P. Bezbaruah) submitted its report to the Reserve Bank in October 2005. The recommendations of the Committee were discussed in the 17th Conference of State Finance Secretaries held on January 13, 2006 and a revised scheme of WMA/Overdraft for State Governments has been operationalised from April 1, 2006. As per the scheme, the aggregate normal WMA limits for 2006-07 have been enhanced to Rs.9,875 crore as against Rs.8,935 crore in the previous year. Incentives in the form of Special WMA have also been provided to the States to invest in CSF/GRF.
(v) Liquidity of State Government Securities
133. A Working Group on Liquidity of State Government Securities (Chairman: Shri V.K.Sharma) was constituted to review the issue of low liquidity of State Government securities and suggest appropriate measures. Drawing from the recommendations of the Group and with a view to widening the investor base in State Development Loans (SDLs), it is proposed:
• to extend the facility of non-competitive bidding (currently limited to Central Government dated securities) to the primary auction of SDLs.
• to introduce purchase and resale of SDLs by the Reserve Bank under the overnight LAF repo operations.
(d) Constitution of Standing Technical Committee on State Governments’ Borrowings
134. It was indicated in the Annual Policy Statement of April 2005 that the implementation of the recommendations of the TFC would have major implications for the market borrowing programmes of States. The Reserve Bank would facilitate smooth transition in consultation with the Central and the State Governments. As a first step, consultations were held with State Finance Secretaries in April 2005. Subsequently, the Government of India constituted a Technical Group (Chairperson: Smt. Shyamala Gopinath) in July 2005 to work out the modalities for a smooth transition to the proposed arrangement. On the basis of the recommendations of the Group, it is proposed:
• to constitute a Standing Technical Committee (STC) under the aegis of the State Finance Secretaries Conference with representation from the Central and State Governments and the Reserve Bank to advise on the wide-ranging issues relating to the borrowing programmes of Central and State Governments through a consensual and co-operative approach.
(e) High Level Expert Committee on Corporate Bonds and Securitisation
135. Pursuant to the announcement made in the Union Budget, 2005-06 a High Level Expert Committee on Corporate Bonds and Securitisation (Chairman: Dr. R.H. Patil) was appointed to examine legal, regulatory, tax and market design issues in the development of the corporate bond market. The recommendations of the Committee included enhancing the issuer as well as investor base, simplification of listing and disclosure norms, rationalisation of stamp duty and withholding tax, consolidation of debt, improving trading systems through introduction of an electronic order matching system, efficient clearing and settlement systems, a comprehensive reporting mechanism, developing market conventions and self-regulation and development of the securitised debt market. In this context, in so far as actions by the Reserve Bank are concerned, it is proposed:
• to constitute a Working Group to examine the relevant recommendations and suggest a roadmap for implementation. Consultation will be held with SEBI and IRDA as appropriate.
Click Here For Highlights of Annual Policy Statement for the Year 2006-07
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