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Development of Local Currency Bond Markets: The Indian Experience Shyamala Gopinath Reserve Bank of India March 6-7, 2007 London.

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Presentation on theme: "Development of Local Currency Bond Markets: The Indian Experience Shyamala Gopinath Reserve Bank of India March 6-7, 2007 London."— Presentation transcript:

1 Development of Local Currency Bond Markets: The Indian Experience Shyamala Gopinath Reserve Bank of India March 6-7, 2007 London

2 Outline of Presentation Structure of Bond Markets in India Structure of Bond Markets in India Institutional Arrangements with RBI Institutional Arrangements with RBI Central Government Central Government Trends in Budget Deficits and Debt Trends in Budget Deficits and Debt Fiscal and Debt Market Reforms Fiscal and Debt Market Reforms Impact of Reforms on the Debt Market Impact of Reforms on the Debt Market Measures to Deal with External Account Pressures Measures to Deal with External Account Pressures State Governments State Governments Trends in Budget Deficits and Debt Trends in Budget Deficits and Debt Fiscal and Debt Market Reforms Fiscal and Debt Market Reforms Issues in Development of State Government Securities Issues in Development of State Government Securities Corporate Bond Market Corporate Bond Market The Way Ahead The Way Ahead

3 Structure of Bond Markets in India Central Government Securities Central Government Securities State Government Securities State Government Securities Corporate Bond Market Corporate Bond Market Securitised Debt Securitised Debt

4 Institutional Arrangements with RBI Banker and Debt Manager to Central Government by Statute Banker and Debt Manager to Central Government by Statute Banker to 26 State Governments and Debt Manager to 28 State Governments by Voluntary Agreements Banker to 26 State Governments and Debt Manager to 28 State Governments by Voluntary Agreements

5 Central Government

6 Trends in Centres Budget Deficit Three Phases Three Phases 1991-92 to 1996-97: Sharp Fiscal Correction 1991-92 to 1996-97: Sharp Fiscal Correction 1997-98 to 2001-02: Deterioration 1997-98 to 2001-02: Deterioration 2002-03 onwards: Fiscal Correction Resumed 2002-03 onwards: Fiscal Correction Resumed

7 Financing Pattern of Centres Gross Fiscal Deficit Low Share of External Borrowings Low Share of External Borrowings Substantial Increase in Share of Domestic Open Market Borrowings Substantial Increase in Share of Domestic Open Market Borrowings

8 Trends in Government Debt-GDP Ratio Similar to the Trends in Budget Deficit Similar to the Trends in Budget Deficit

9 Centres Fiscal Responsibility Act Enactment of FRBM Act : August 26, 2003 Enactment of FRBM Act : August 26, 2003 Came into force from July 5, 2004 Came into force from July 5, 2004 Elimination of RD by 2008-09 (3.6% in 2003-04) and revenue surplus thereafter 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) 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 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 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 RBI prohibited from Participation in Primary Issuances of G-Secs

10 Central G-Sec Market: Pre-Reform Period Features Features –Administered and Low Interest Rates –High Statutory Liquidity Ratio (SLR) –Automatic Monetisation of Budget Deficit –High Cash Reserve Ratio (CRR) Impact Impact –Preemption of Financial Savings –No possibility of Price Discovery –Dormant Debt Market

11 Reforms in the Central G-Sec Market Three Phases Three Phases First Phase (1992-95) First Phase (1992-95) –Creation of Enabling Environment Elimination of Automatic Monetisation Elimination of Automatic Monetisation Introduction of Auctions Introduction of Auctions SLR reduced SLR reduced Second Phase (1995-2000) Second Phase (1995-2000) –Institutional Development DvP DvP Primary Dealers Primary Dealers FIMMDA and PDAI FIMMDA and PDAI –Instrument Diversification Floating Rate Bonds Floating Rate Bonds Capital Indexed Bonds Capital Indexed Bonds

12 Reforms in the Central G-Sec Market (Contd) Third Phase Third Phase –Enhance Liquidity and Efficiency Indicative Auction Calendar Indicative Auction Calendar Non-Competitive Bidding Facility Non-Competitive Bidding Facility Liquidity Adjustment Facility Liquidity Adjustment Facility Repo and collateralised borrowing lending system Repo and collateralised borrowing lending system Negotiated Dealing System (NDS), STP and CCP Negotiated Dealing System (NDS), STP and CCP Interest Rate derivatives Interest Rate derivatives Market Stabilisation Scheme Market Stabilisation Scheme Foreign investment in local currency debt instruments Foreign investment in local currency debt instruments Conversion of special securities into marketable debt Conversion of special securities into marketable debt

13 Reforms in the Central G-Sec Market (Concld) Reforms undertaken in the context of FRBM Act 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

14 Snapshot of the Central G-Sec Market Increase in Stock and Turnover Increase in Stock and Turnover

15 Maturity and Yield Elongation of Maturity Profile Elongation of Maturity Profile General Reduction in Weighted Average Yield General Reduction in Weighted Average Yield

16 Yield Curve Development of a Smooth Yield Curve Development of a Smooth Yield Curve

17 Ownership Pattern of Central G-Secs More Diversification More Diversification

18 External Borrowings Low Share of External Debt Low Share of External Debt External Borrowings only from Multilateral and Bilateral Sources External Borrowings only from Multilateral and Bilateral Sources

19 Measures to Deal with External Account Pressures India Development Bonds (IDBs) (1991): US$1.6 billion India Development Bonds (IDBs) (1991): US$1.6 billion Resurgent India Bonds (RIBs) (1998): US$4.2 billion Resurgent India Bonds (RIBs) (1998): US$4.2 billion India Millennium Deposits (IMDs) (2000): US$5.5 billion India Millennium Deposits (IMDs) (2000): US$5.5 billion

20 Original Sin? India 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 Issues –pros and cons of sovereign foreign currency borrowing –Rationale for calibrating foreign investment in domestic currency bonds

21 Indias External Debt Cautious approach Cautious approach Sovereign, corporates, financial intermediaries Sovereign, corporates, financial intermediaries Total External debt $132 bn as at end Sept 2006 Total External debt $132 bn as at end Sept 2006 Long-term debt $126 bn Long-term debt $126 bn Rise in external debt –ECBs, NRI, short- term Rise in external debt –ECBs, NRI, short- term

22 State Governments

23 Trends in Budget Deficit Strong Improvement since early part of this decade Strong Improvement since early part of this decade Build up of Surplus Cash Balance in Recent Years: Buyback of Securities by some States Build up of Surplus Cash Balance in Recent Years: Buyback of Securities by some States

24 Financing Pattern of Fiscal Deficit Share of Central Loans has reduced Share of Central Loans has reduced Share of Market Loans has increased since early 1990s Share of Market Loans has increased since early 1990s NSSF continues to predominate NSSF continues to predominate

25 Fiscal Reforms Twelfth Finance Commission Twelfth Finance Commission Fiscal Restructuring Plan: Fiscal Discipline Fiscal Restructuring Plan: Fiscal Discipline Incentivised Enactment of FRL through Debt Consolidation and Relief Facility (DCRF) Incentivised Enactment of FRL through Debt Consolidation and Relief Facility (DCRF) Financial Disintermediation by Centre Financial Disintermediation by Centre ExperienceExperience FRL Enactment – 24 States FRL Enactment – 24 States RD to be nearly eliminated and GFD-GDP ratio to decline to 2.7% in 2006-07 RD to be nearly eliminated and GFD-GDP ratio to decline to 2.7% in 2006-07

26 Market Borrowings of State Governments Till 1998-99: Tap Issuances Till 1998-99: Tap Issuances States encouraged to adopt auction route: 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 2004- 05 conducted through auctions Auction calendar proposed to be issued by States Auction calendar proposed to be issued by States

27 State Government Securities - issues Negligible Secondary Market Liquidity 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 Proposed Measures – Non-competitive bidding – Issuance calendar – Use for Liquidity adjustment facility

28 Corporate Bond Market

29 Corporate Bond markets historically late to develop Corporate Bond markets historically late to develop Access to bank credit Access to bank credit Access to external sources of finance Access to external sources of finance Require well developed accounting legal and regulatory systems Require well developed accounting legal and regulatory systems Rating agencies Rating agencies Rigorous disclosure standards and effective governance of corporations Rigorous disclosure standards and effective governance of corporations Payment and settlement systems Payment and settlement systems Secondary markets Secondary markets

30 Reforms in Corporate Bond Market Four Rating agencies operating in India Four Rating agencies operating in India De-materialisation and electronic transfer of securities De-materialisation and electronic transfer of securities Initial focus – reform of private placement market by encouraging rating of issues Initial focus – reform of private placement market by encouraging rating of issues Further reforms needed Further reforms needed Appointment of a High Powered Committee Appointment of a High Powered Committee

31 High-powered committee recom Enhance the issuer base and investor base including measures to bring in retail investors 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 Listing of primary issues and creation of a centralized database of primary issues Electronic trading system Electronic trading system Comprehensive automated trade reporting system Comprehensive automated trade reporting system Safe and efficient clearing and settlement standards Safe and efficient clearing and settlement standards Repo in corporate bonds Repo in corporate bonds Promote credit enhancement Promote credit enhancement Specialized debt funds to fund infrastructure projects Specialized debt funds to fund infrastructure projects Development of a municipal bond market Development of a municipal bond market

32 The Way Ahead Build upon the Strong Macroeconomic Performance Build upon the Strong Macroeconomic Performance –Adherence to FRL –Stability of Inflation Rate -external debt management policy Pension reforms Active Consolidation Active Consolidation Floating Rate Bonds and Inflation-Indexed Bonds Floating Rate Bonds and Inflation-Indexed Bonds STRIPS STRIPS Corporate Bonds Corporate Bonds –Bond Insurance Institutions –Institutional Investors: Credit Enhancers –Securitised paper to be traded on exchanges –Municipal Bonds, Mortgage Backed Securities, General Securitised Paper

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