Development of Local
Currency Bond Markets:
The Indian Experience
Shyamala Gopinath
Reserve Bank of India
March 6-7, 2007
London
Outline of Presentation
• Structure of Bond Markets in India
• Institutional Arrangements with RBI
• Central Government




Trends in Budget Deficits and Debt
Fiscal and Debt Market Reforms
Impact of Reforms on the Debt Market
Measures to Deal with External Account Pressures
• State Governments
 Trends in Budget Deficits and Debt
 Fiscal and Debt Market Reforms
 Issues in Development of State Government Securities
• Corporate Bond Market
• The Way Ahead
Structure of Bond Markets in India
• Central Government Securities
• State Government Securities
• Corporate Bond Market
• Securitised Debt
Institutional Arrangements with RBI
• Banker and Debt Manager to Central
Government by Statute
• Banker to 26 State Governments and Debt
Manager to 28 State Governments by
Voluntary Agreements
Central Government
Trends in Centre’s Budget Deficit
• Three Phases
1991-92 to 1996-97: Sharp Fiscal Correction
1997-98 to 2001-02: Deterioration
2002-03 onwards: Fiscal Correction Resumed
Gross Fiscal
Deficit
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 200691
92
96
01
02
03
04
05
06
07
(RE) (BE)
7.85 5.56 5.07 5.64 6.18 5.92 4.47 4.01 4.14 3.76
Revenue Deficit
3.26
2.49
2.50
4.01
4.39
4.40
3.56
2.51
2.60
2.14
Gross Primary
Deficit
4.07
1.49
0.86
0.93
1.47
1.11
-0.03
-0.06
0.46
0.22
Financing Pattern of Centre’s
Gross Fiscal Deficit
• Low Share of External Borrowings
• Substantial Increase in Share of Domestic
Open Market Borrowings
External
Finance
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 200691
92
96
01
02
03
04
05
06
07
(RE) (BE)
7.1 14.9
0.5
6.3
4.0
-8.2 -10.9 11.8
5.1
5.6
Market
Borrowing
17.9
20.7
56.4
61.8
64.4
71.8
72.1
40.7
69.2
76.5
Others
Borrowing
49.5
45.5
26.8
32.9
32.7
35.2
42.0
54.0
15.4
17.9
Trends in Government Debt-GDP Ratio
Per cent
• Similar to the Trends in Budget Deficit
90
80
70
60
50
40
30
20
10
0
1980-81
1990-91
1996-97
Centre
2000-01
States
2004.05
Total
2006-07
(BE)
Centre’s Fiscal Responsibility Act
• Enactment of FRBM Act : August 26, 2003
• Came into force from July 5, 2004
• Elimination of RD by 2008-09 (3.6% in 2003-04)
•
•
•
•
and revenue surplus thereafter
Containment of GFD to 3 % of GDP by 2008-09
(4.5% in 2003-04)
RD and GFD placed at 2.0% and 3.7% of GDP in
2006-07 (RE)
RD and GFD budgeted to decline to 1.5% and
3.3% of GDP in 2007-08
RBI prohibited from Participation in Primary
Issuances of G-Secs
Central G-Sec Market: Pre-Reform Period
• Features
– Administered and Low Interest Rates
– High Statutory Liquidity Ratio (SLR)
– Automatic Monetisation of Budget Deficit
– High Cash Reserve Ratio (CRR)
• Impact
– Preemption of Financial Savings
– No possibility of Price Discovery
– Dormant Debt Market
Reforms in the Central G-Sec Market
• Three Phases
• First Phase (1992-95)
– Creation of Enabling Environment
• Elimination of Automatic Monetisation
• Introduction of Auctions
• SLR reduced
• Second Phase (1995-2000)
– Institutional Development
• DvP
• Primary Dealers
• FIMMDA and PDAI
– Instrument Diversification
• Floating Rate Bonds
• Capital Indexed Bonds
Reforms in the Central G-Sec Market (Cont’d)
• Third Phase
– Enhance Liquidity and Efficiency
• Indicative Auction Calendar
• Non-Competitive Bidding Facility
• Liquidity Adjustment Facility
• Repo and collateralised borrowing lending system
• Negotiated Dealing System (NDS), STP and CCP
• Interest Rate derivatives
• Market Stabilisation Scheme
• Foreign investment in local currency debt instruments
• Conversion of special securities into marketable debt
Reforms in the Central G-Sec Market (Concl’d)
• Reforms undertaken in the context of FRBM Act
– Functional Separation of Debt and Monetary
Management: Creation of FMD
– Extension of PD business to Banks
– Revised Scheme of Underwriting by PDs: 100%
Underwriting by PDs
– NDS-OM
– Short-Sale
– When Issued market
– Considering Active Consolidation
Snapshot of the Central G-Sec Market
• Increase in Stock and Turnover
Outstanding stock (Rs. in billion)
Outstanding stock as ratio of GDP (per
cent)
Turnover / GDP (per cent)
Average maturity of the securities
issued during the year (in Years)
Weighted average cost of the securities
issued during the year (Per cent)
Minimum and maximum maturities of
stock issued during the year (in Years)
1992
769
14.68
1996
1375
14.2
2002
5363
27.89
2003
6739
27.29
2004
2005
2006
8,243
8,953
9,767
29.87
28.69
27.67
--
34.21
157.68
202.88
217.3
239.9
212.9
--
5.7
14.3
13.8
14.94
14.13
16.9
11.78
13.77
9.44
7.34
5.71
6.11
7.34
N.A.
2-10
5-25
7-30
4-30
5-30
5-30
Maturity and Yield
• Elongation of Maturity Profile
• General Reduction in Weighted Average Yield
18
16
12
10
8
6
4
2
Weighted Average Yield (per cent)
Weighted Average Maturity (years)
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
1999-00
1998-99
1997-98
1996-97
0
1995-96
Per cent / Years
14
Yield Curve
Per cent
• Development of a Smooth Yield Curve
16
14
12
10
8
6
4
2
0
1
3
5
7
9
11
13
15
17
19
21
23
Maturity (Years)
Mar-97
Mar-04
Jan-07
25
27
29
Ownership Pattern of Central G-Secs
• More Diversification
Chart 5: Ownership Pattern of Central G-Secs:
1991
Reserve B ank o f Ind ia (o wn acco unt )
0% 5%
1%
0%
Co mmercial B anks
25%
13%
Lif e Insurance Co rp o rat io n o f Ind ia #
Unit Trust o f Ind ia
NA B A RD
Emp lo yees Pro vid ent Fund Scheme
Co al M ines Pro vid ent Fund Scheme
Primary d ealers
56%
Ot hers
Chart 6: Ownership Pattern of Central G-Secs:
2005
0%
Res erve Bank of India
(own account)
Com m ercial Banks
0%
2%
16%
7%
Life Ins urance
Corporation of India #
Unit Trus t of India
0%
0%
NABARD
20%
53%
Em ployees Provident
Fund Schem e
Coal Mines Provident
Fund Schem e
Prim ary dealers
Others
External Borrowings
• Low Share of External Debt
• External Borrowings only from Multilateral
and Bilateral Sources
100.0
Per cent
80.0
60.0
40.0
20.0
0.0
1950-51 1980-81 1990-91 2000-01 2006-07
(BE)
Domestic Liabilities
External Liabilities
Measures to Deal with
External Account Pressures
• India Development Bonds (IDBs) (1991):
US$1.6 billion
• Resurgent India Bonds (RIBs) (1998): US$4.2
billion
• India Millennium Deposits (IMDs) (2000):
US$5.5 billion
Original Sin?
• India
– Low Share of External Liabilities in Sovereign
Borrowing
– Sovereign Borrowings only from Multilateral/Bilateral
Sources
– States not permitted to raise external debt directly
– Foreign investment allowed in locaL currency bonds
but within an overall ceiling
• Issues
– pros and cons of sovereign foreign currency
borrowing
– Rationale for calibrating foreign investment in
domestic currency bonds
India’s External Debt
• Cautious approach
• Sovereign, corporates, financial
intermediaries
• Total External debt $132 bn as at end Sept
2006
• Long-term debt $126 bn
• Rise in external debt –ECBs, NRI, shortterm
State Governments
Trends in Budget Deficit
• Strong Improvement since early part of this
decade
• Build up of Surplus Cash Balance in Recent
Years: Buyback of Securities by some States
GFD
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 200691
92
96
01
02
03
04
05
06
07
(RE) (BE)
3.3 2.89 2.65 4.25 4.21 4.17 4.46
3.5 3.23 2.68
Revenue Deficit
0.93
0.87
0.69
Gross Primary
Deficit
1.78
1.22
0.8
2.54
2.59
2.25
2.22
1.17
0.49
0.05
0.09 -0.15 -0.61 -0.75 -1.65 -2.03 -2.47
Financing Pattern of Fiscal Deficit
• Share of Central Loans has reduced
• Share of Market Loans has increased since
early 1990s
• NSSF continues to predominate
Loan From
Central Gov.
1990- 1991- 1995- 2000- 2001- 2002- 2003- 2004- 2005- 200691
92
96
01
02
03
04
05
06
07
(RE) (BE)
53.1
49.6
47.1
9.4
11.4
-0.9
11.5 -15.1
2.3
4.8
Market
Borrowing
NSSF
Others
12.0
-
17.5
33.3
18.7
32.9
34.2
14.0
18.0
27.9
38.4
30.1
15.7
21.0
36.4
37.1
51.2
16.9
66.5
65.0
53.5
40.2
33.5
21.9
33.2
18.5
17.0
20.7
Fiscal Reforms
• Twelfth Finance Commission
Fiscal Restructuring Plan: Fiscal Discipline
Incentivised Enactment of FRL through Debt
Consolidation and Relief Facility (DCRF)
Financial Disintermediation by Centre
• Experience
FRL Enactment – 24 States
RD to be nearly eliminated and GFD-GDP ratio to
decline to 2.7% in 2006-07
Market Borrowings of State
Governments
• Till 1998-99: Tap Issuances
• States encouraged to adopt auction route:
– 100 % of market borrowing in 2006-07 so far
as against 48.5% in 2005-06 and 2% in 200405 conducted through auctions
• Auction calendar proposed to be issued by
States
State Government Securities - issues
• Negligible Secondary Market Liquidity
– Low level of outstanding stock
– Predominance of buy-and-hold investors
– Disconnect between the uniform coupon fixed in
tap issues and secondary market yield
– Fragmentation across issuers and securities
• Proposed Measures
– Non-competitive bidding
– Issuance calendar
– Use for Liquidity adjustment facility
Corporate Bond Market
Corporate Bond Market
• Corporate Bond markets historically late to
•
•
•
•
•
•
•
develop
Access to bank credit
Access to external sources of finance
Require well developed accounting legal and
regulatory systems
Rating agencies
Rigorous disclosure standards and effective
governance of corporations
Payment and settlement systems
Secondary markets
Reforms in Corporate Bond Market
• Four Rating agencies operating in India
• De-materialisation and electronic transfer
of securities
• Initial focus – reform of private placement
market by encouraging rating of issues
• Further reforms needed
• Appointment of a High Powered
Committee
High-powered committee recom
• Enhance the issuer base and investor base including
•
•
•
•
•
•
•
•
measures to bring in retail investors
Listing of primary issues and creation of a centralized
database of primary issues
Electronic trading system
Comprehensive automated trade reporting system
Safe and efficient clearing and settlement standards
Repo in corporate bonds
Promote credit enhancement
Specialized debt funds to fund infrastructure projects
Development of a municipal bond market
The Way Ahead
• Build upon the Strong Macroeconomic
Performance
•
•
•
•
– Adherence to FRL
– Stability of Inflation Rate
-external debt management policy
Pension reforms
Active Consolidation
Floating Rate Bonds and Inflation-Indexed Bonds
STRIPS
Corporate Bonds
– Bond Insurance Institutions
– Institutional Investors: Credit Enhancers
– Securitised paper to be traded on exchanges