[India] CIBs

8/9/2019 [India] CIBs

1/14

PUBLIC DEBT MANAGEMENTVI

VI.1 Public debt management by the Reserve Bankin 2004-05 was guided by the twin objectives ofminimisation of cost over time and lengthening of thematurity profile of debt for both the Centre and the Statesin a scenario of upward shifting yield curves. The marketborrowing programme of the Central and StateGovernments was successfully completed in easyliquidity conditions. The weighted average cost of marketborrowings of the Centre as well as the States increasedmarginally after eight years of consecutive decline,

reflecting the hardening of interest rates attributable touncertainty surrounding international oil prices, theupturn in global interest rates, buoyant domestic growthand sharp spikes in domestic inflation. The weightedaverage maturity of the primary issuances of Centreand States under the market borrowing programmeduring the year declined marginally. The CentralGovernment did not avail of overdraft during 2004-05.The utilisation of WMA by State Governments was alsolower as compared with the previous year. Issuancesof Floating Rate Bonds (FRBs) continued as part of theendeavour to provide a diversified pool of instrumentsto investors and in a scenario of firming yields, theyfacilitated the hedging of interest rate risk. The proposedre-introduction of the Capital Indexed Bonds (CIBs) in2005-06 would help to widen the investor base andprovide the holders with an inflation risk free return ontheir investment.

VI.2 This section reviews the Reserve Banks debtmanagement operations in response to thecomplexities in market processes, technologicalrequirements for efficient functioning and the ongoingchanges in the macroeconomic environment. Thereview highlights the distinct improvement in theCentral Governments fiscal position, reflected in thebuild-up of surplus cash balances with the ReserveBank on an enduring basis despite a sharp decline ingross and net borrowings. The overview of States debt

management indicates the emergence of financialdiscipline, reflecting the impact of institutionalmeasures undertaken in the recent past.

CENTRAL GOVERNMENT

Ways and Means Advances

VI.3 The Ways and Means Advances (WMA) limitsof the Central Government remained unchanged atRs.10,000 crore for the first half (April-September) of2004-05 and Rs.6,000 crore for the second half(October-March). The interest rate on WMA continuedto be at the Bank Rate and on overdraft at twopercentage points above the Bank Rate. A noteworthydevelopment was that the Central Government didnot resort to overdraft in 2004-05 for the first timesince the operationalisation of WMA Scheme in April1997 (Table 6.1).

152

Table 6.1: Overdraft Position of Central Government

Month 2004-05 2003-04

Range of Overdraft No. of No. of Range of Overdraft No. of No. of(Rupees crore) Days Occasions (Rupees crore) Days Occasions

1 2 3 4 5 6 7April 1,642-9,656 15 2

May 900-5,867 9 3

June 875-8,349 5 1

July 383-5,288 14 4

August

September

October

November

December

January

February

March

Total 0-9,656 43 10


2/14

VI.4 The Centre maintained surplus cash balancesin its current account with the Reserve Bank duringmost part of the year, mainly due to substantial inflows

on account of prepayment of high cost debt by theStates under the debt swap scheme (DSS) and otherreceipts. Investment of the Central Governmentssurplus cash balances in dated securities wasdiscontinued temporarily from April 8, 2004 in orderto shore up the existing stock of securities for theconduct of monetary policy. With the introduction ofthe Market Stabilisation Scheme (MSS) to absorbliquidity, investment of surplus balances was partiallyrestored for investments up to Rs.10,000 crore fromJune 12, 2004. This limit was increased to Rs.20,000crore, effective October 14, 2004. As at end-March

2005, the Central Governments surplus cashbalances in the form of investment balance (Rs.20,000crore) and cash balance (Rs.6,202 crore) amountedto Rs.26,202 crore, almost the same as at end-March2004 (Rs.26,669 crore) (Chart VI.1). During the fiscalyear, the Central Government took recourse to WMAon several occasions till September 9, 2004 butmaintained surpluses thereafter.

Treasury Bills

VI.5 The notified amounts of 91-day and 364-dayTreasury Bills (TBs) were increased from Rs.500

crore and Rs.1,000 crore to Rs.2,000 crore each in2004-05, the increase being entirely on account ofissuances under the MSS with a view to absorbingsurplus l iquidi ty from the system. Scheduledissuances of the MSS portion of 91-day and 364-day TBs during the period from November 10, 2004to December 1, 2004 and that of 364-day TBs auctionof December 22, 2004 were cancelled on accountof temporary tightness in liquidity conditions. Theweighted average yields of 91-day and 364-day TBsincreased by 26 basis points and 48 basis points,

respectively, during 2004-05 (Table 6.2 and AppendixTable I.44).

VI.6 Reflecting movements in inflation rates, theprimary market yields of both 91-day and 364-day TBsincreased by 108 and 135 basis points, respectively,during the year to 5.32 per cent and 5.66 per cent(Chart VI.2).

VI.7 The average implicit yields for both 91-day and364-day TBs remained stable up to July 2004 butincreased sharply to reach intra-year peaks of 5.47per cent and 5.71 per cent in November 2004. Theyields, which were hovering at sub-reverse repo ratelevels during April-July 2004, thus rose above thereverse repo rate during August 2004. With easing ofheadline inflation, the implicit yield declined graduallythereafter. The yield spread between the 91-day and364-day TBs widened from six basis points in April

153

PUBLIC DEBT MANAGEMENT

Rupeescrore

Chart VI.1: Cash Balances of the Central Government

31-Mar-04

27-Apr-04

22-May-0

4

15-Jun-0

4

9-Jul-04

2-Aug-0

4

26-Aug-0

4

20-Sep-0

4

15-Oct-04

9-Nov-0

4

6-Dec-0

4

30-Dec-0

4

24-Jan-0

5

17-Feb-0

5

14-Mar-05

8-Apr-05

6-May-0

5

31-May-0

5

23-Jun-0

5

18-Jul-05

10-Aug-0

5

Table 6.2: Treasury Bills - A Profile

(Rupees crore)

Type of Weighted Average Gross Amount Net Amount Outstanding

Treasury Bill Cut-off Yield Amount

(per cent)

2004-05 2003-04 2004-05* 2003-04 2004-05* 2003-04 2004-05* 2003-04

1 2 3 4 5 6 7 8 9

91-day 4.89 4.63 1,00,592 36,786 20,653 (-) 2,488 27,792 7,139(67,955) (19,500) (19,500)

364-day 5.15 4.67 47,132 26,136 20,997 9 47,132 26,136(20,981) (20,981) (20,981)

* Includes issuances under the MSS.

Note: Figures in parentheses pertain to issuances under the MSS.


3/14

154

ANNUAL REPORT

2004 to 39 basis points in March 2005. The bid-coverratio in the auctions was generally more than twoduring 2004-05, reflecting favourable l iquidityconditions and market appetite for short termsecurities (Table 6.3).

VI.8 It was decided in consultation with the CentralGovernment to re-introduce, effective April 6, 2005,fortnightly auctions of 182-day TBs to be conductedon each Wednesday preceding a non-reporting Friday.

The notified amount of 182-day TBs was fixed atRs.1,500 crore, including Rs.1,000 crore under theMSS. The notified amounts of both 91-day and 364-

day TBs were kept unchanged at Rs.2,000 crore,including Rs.1,500 crore and Rs.1,000 crore,respectively, under the MSS.

Dated Securities

VI.9 Comfortable liquidity conditions and lower thanbudgeted market borrowings facilitated a smoothcompletion of the market borrowing programme of theCentral Government. The Central Government raiseda gross amount (excluding issuances under the MSS)of Rs.1,06,501 crore (a net amount of Rs.46,050crore) through the issuance of dated securities and

364-day TBs during the year, significantly lower thanRs.1,47,636 crore (net Rs.88,816 crore) raised duringthe previous year (excluding Rs.14,434 crore issuedunder the debt buy back scheme). This was onaccount of a number of factors. First, the CentralGovernment had privately placed securi t iesamounting to Rs.16,500 crore with the Reserve Bankto prepay relatively high cost external debt during2003-04; however, no prepayment was effected in2004-05. Second, the higher amount of marketborrowings in 2003-04 resulted in a sharp increasein surplus cash balances to Rs.26,669 crore as at

end-March 2004 from Rs.8,905 crore as at end-March2003; during 2004-05, on the other hand, such cashbalances exhibited a marginal decline. Third,investments in 14-day Intermediate TBs emerged asa major source of financing in 2004-05 as comparedwith 2003-04. Finally, the DSS lowered the Centresmarket borrowing requirement both in 2003-04 and in2004-05. However, while the impact of the DSS wasoffset by prepayment of external debt and build-up ofsurplus cash balances during 2003-04, there was nosuch offsetting factor in 2004-05, resulting in lowermarket borrowings.

VI.10 During 2004-05, the Central Governmentraised a total amount of Rs.80,350 crore throughdated securities; of this, Rs.80,000 crore was raisedthrough 19 auctions (comprising 13 reissues and sixnew issues) and Rs.350 crore by way of privateplacement (new issue) (Appendix Tables I.41 and I.43).The Centre had raised Rs.1,00,000 crore through 22auctions (6 new issues and 16 reissues) andRs.21,500 crore through private placement in 2003-04.Two issuances of Floating Rate Bonds (FRBs)devolved partially on the Reserve Bank and PrimaryDealers (PDs) amounting to Rs.847 crore and Rs.985

crore, respectively. This was in contrast to the previous

Table 6.3: Treasury Bills Primary Market @

Month Average Implicit Bid-Cover Ratio*Yield at Minimum

Cut-off Price (Per cent)

91-day 364-day 91-day 364-day

1 2 3 4 5

Apr-04 4.38 4.44 2.15 2.47May-04 4.39 4.33 2.93 2.46

Jun-04 4.44 4.55 2.61 1.28

Jul-04 4.46 4.60 2.39 2.06Aug-04 4.76 5.00 1.81 3.36Sep-04 4.72 5.14 2.51 2.83

Oct-04 5.15 5.46 1.82 2.75

Nov-04 5.47 5.71 2.80 2.64Dec-04 5.30 5.69 2.69 2.81

Jan-05 5.31 5.69 2.19 2.06Feb-05 5.25 5.65 2.99 2.81Mar-05 5.24 5.63 2.31 2.74

Apr-05 5.17 5.62 4.03 2.54

May-05 5.19 5.58 3.30 2.29June-05 5.29 5.61 1.54 1.81

July-05 5.46 5.81 1.21 1.68

@: As per dates of auction.

* : Ratio of competitive Bids Received (BR) to Notified Amount (NA).

Percent

Chart VI.2: Primary Yields of Treasury Bills

91-day Treasury Bills 364-day Treasury Bills

Date of Auction

31-Mar-04

30-Apr-04

31-May-0

4

30-Ju

n-0

4

31-Jul-04

31-Aug-0

4

30-Se

p-0

4

31-O

ct-04

30-Nov-0

4

31-Dec-0

4

31-Ja

n-0

5

28-Fe

b-0

5

31-Mar-05

30-Apr-05

31-May-0

5

30-Ju

n-0

5

31-Jul-05


4/14

155


year, when there was no devolvement on the ReserveBank and PDs. During 2004-05, securities amountingto Rs.350 crore were privately placed with the

Reserve Bank as against Rs.21,500 crore (includingRs.16,500 crore on account of prepayment of externaldebt) in the previous year. The Reserve Bankcontinued to pursue the policy of elongation of thematurity profile of Government debt while keepingin view investor response. Of the 20 primaryissuances under the market borrowing programmeduring 2004-05, eight securities issued were withresidual maturity of more than 20 years. The sevennew issues included five issues of FRBs.

VI.11 According to the issuance calendar for thefirst half (April-September) of 2004-05, dated

securities for face value of Rs.59,000 crore were tobe issued through auctions. As against this, auctionsof dated securities amounting to Rs.54,000 crorewere conducted; the auction of Rs.5,000 crorescheduled in Apri l 2004 was cancel led. OnSeptember 20, 2004, an indicative calendar for issueof dated securities for the second half (October -March) of 2004-05 for Rs.44,000 crore was issued;of this, Rs.26,000 crore were auctioned, while thebalance scheduled auctions for Rs.18,000 crorewere cancelled. The weighted average yield of thedated securities issued during 2004-05 worked out

to 6.11 per cent as compared with 5.71 per centduring the previous year. The weighted averagematurity of the dated securities issued during 2004-05 worked out to 14.13 years as compared with 14.94years during 2003-04 (Chart VI.3).

Table 6.4: Central Government's Market Loans - A Profile*

(Yield in per cent/Maturity in years)Year YTMs at Primary Issues (%) Weighted Range of Weighted Weighted Weighted

Average Maturities Average Average Average

Under 5 5-10 Over 10 Yield of Maturity Maturity of Yield of

years years years New Loans outstanding outstandingstock stock

1 2 3 4 5 6 7 8 9

1997-98 10.85-12.14 11.15-13.05 12.01 3-10 6.60 6.50 ..

1998-99 11.40-11.68 11.10-12.25 12.25-12.60 11.86 2-20 7.70 6.30 ..

1999-00 10.73-11.99 10.77-12.45 11.77 5-19 12.60 7.10 ..

2000-01 9.47-10.95 9.88-11.69 10.47-11.70 10.95 2-20 10.60 7.50 ..

2001-02 6.98-9.81 7.18-11.00 9.44 5-25 14.30 8.20 10.84

2002-03 6.65-8.14 6.84-8.62 7.34 7-30 13.80 8.90 10.44

2003-04 4.69 4.62-5.73 5.18-6.35 5.71 4-30 14.94 9.80 9.30

2004-05 5.90 5.53-7.20 4.49-8.24 6.11 5-30 14.13 9.63 8.79

2005-06 @ 6.80-7.06 6.91-7.98 7.28 5.29 13.76 9.57 8.75

* : Excludes issuances under MSS. YTM: Yield to Maturity .. : Not available. : No Issues.

@ : Up to August 12, 2005.

VI.12 The weighted average coupon on theoutstanding stock of government securi t iescontinued to decline during 2004-05. On the otherhand, the weighted average maturi ty of theoutstanding securities, which had been rising since1999-2000, fell marginally to 9.63 years as on March31, 2005 (Table 6.4).

VI.13 Securities over 10-year maturity constitutedthe largest share in the outstanding stock of secur itiesas well as in new issuances (Table 6.5). Out of the121 outstanding marketable securities amounting to

Percent/Years

Chart VI.3: Yield and Maturity of

Central Government Dated Securities

Weighted Average Yield (per cent)

Weighted Average Maturity (years)


5/14

156

ANNUAL REPORT

Rs.8,95,348 crore as at end-March 2005, 44securities with minimum outstanding amount ofRs.10,000 crore or more accounted for 67 per cent ofthe total outstanding amount as compared with 63per cent at end-March 2004. 29 securities withoutstanding amount between Rs,5,000-Rs.10,000crore accounted for 22 per cent of the totaloutstanding amount at end-March 2005.

VI.14 The stock of Central Government securitiesheld by the Reserve Bank fell by Rs.7,071 croreduring 2004-05 (Table 6.6).

VI.15 The repayment schedule of outstandingmarket loans of the Central Government as on March31, 2005 indicates bunching of repayments between2009-10 and 2015-16 (Table 6.7).

Table 6.5: Maturity Profile ofCentral Government Securities

(Per cent)

Outstanding Stock Issued during the Year

Year Under 5 5-10 Over 10 Under 5 5-10 Over 10

(End-March) Years Years Years Years Years Years

1 2 3 4 5 6 7

1997-98 41 41 18 18 82 0

1998-99 41 42 16 18 68 14

1999-00 37 39 24 0 35 65

2000-01 27 47 26 6 41 53

2001-02 31 36 33 2 24 74

2002-03 26 35 39 0 36 64

2003-04 24 32 44 5 15 80

2004-05 27 30 43 11 11 78

Table 6.6: Reserve Bank's Stock of CentralGovernment Securities

(Rupees crore)

Year Outstanding Special Securities Total

(End-March) Dated Issued in Out-

Securities* Conversion of standing*

Ad-hoc

Treasury Bills

1 2 3 4

1996-97 6,666 1,21,818 1,28,484

1997-98 31,977 1,01,818 1,33,795

1998-99 42,212 1,01,818 1,44,030

1999-00 35,190 1,01,818 1,37,008

2000-01 41,732 1,01,818 1,43,550

2001-02 40,927 1,01,818 1,42,745

2002-03 55,438 61,818 1,17,256

2003-04 77,397 0 77,397

2004-05 80,770 0 80,770

* Inclusive of securities sold under the LAF.

Table 6.7: Repayment Schedule of Centre'sOutstanding Market Loans

(As on March 31, 2005)

Year Rs. crore

1 2

2005-06 55,631 *

2006-07 44,079 **

2007-08 45,876

2008-09 44,028

2009-10 52,589

2010-11 56,586

2011-12 55,581

2012-13 57,074

2013-14 59,009

2014-15 42,018

2015-16 65,244

2016-17 48,130

2017-18 50,774

2018-19 37,478

2019-20 28,000

2020-21 11,000

2021-22 13,213

2022-23 32,000

2023-24 21,000

2025-26 16,688

2026-27 15,000

2027-28 15,000

2028-29 11,000

2032-33 14,000

2034-35 4,350

Total 8,95,348

* : Including repayment of Rs.20,000 crore under the MSS.** : Including repayment of Rs.5,000 crore under the MSS.

VI.16 The share of securities with coupon at 10 percent and above continued to fall in keeping with thedeclining trend of the last five years (Table 6.8).

Table 6.8: Interest Rate Profile ofOutstanding Central Government Securities

(As on March 31, 2005)

Interest Rate Outstanding Amount Share in(Per cent) (Rupees crore) (Per cent)

1 2 3

4.00-4.99 42,500 4.75

5.00-5.99 96,818 10.81

6.00-6.99 1,51,772 16.95

7.00-7.99 1,34,540 15.03

8.00-8.99 37,638 4.20

9.00.-9.99 56,424 6.30

10.00-10.99 83,537 9.33

11.00-11.99 1,65,646 18.50

12.00-12.99 94,249 10.53

13.00-14.00 32,222 3.60

Total 8,95,348 100.0


6/14

157


VI.17 For 2005-06, the Union Budget has placednet market borrowings (excluding MSS) of theCentral Government at Rs.1,10,295 crore (inclusive

of net issuances of 182-day TBs). Includingrepayments of Rs.68,272 crore (Rs.35,631 crore ofdated securities, Rs.26,141 crore of 364-day TBs andRs.6,500 crore of 182-day TBs), the gross marketborrowing is estimated at Rs.1,78,467 crore(Rs.1,39,467 crore through dated securities andRs.26,000 crore through 364-day TBs and 13,000crore through 182-day TBs). Thus, the budgetedgross borrowings are significantly higher than theactual amount raised in 2004-05. An indicativeissuance calendar for issue of dated securities forthe first half of the year 2005-06 was issued inconsultation with the Government for an aggregateamount of Rs.83,000 crore (Table 6.9). As in the past,the Reserve Bank wil l have flexibil i ty to varyissuances of Government securities keeping in viewthe emerging requirements of the Government.During 2005-06 so far (up to August 19, 2005), grossmarket borrowing (excluding issuances under theMSS) raised by the Central Government throughdated securi t ies, 182-day and 364-day TBs

amounted to Rs.89,796 crore (net Rs.54,514 crore)as compared with Rs.55,030 crore (net Rs.18,224crore) during the corresponding period of the

previous year. All issuances were by way of fixedcoupon securities as against a share of 59 per centduring the corresponding per iod of the previous year,reflecting the favourable market appetite for suchsecurities. There has been no devolvement/privateplacement during the year so far. To facilitateconsolidation and impart liquidity to the Governmentsecurities market, all the securities were reissuancesof securities issued earlier.

VI.18 Instrument diversification has been a keycomponent of the Reserve Banks initiatives for thedevelopment of the Government securities market.

As a part of this effort, a capital indexed bond (CIB)was issued for the first time on December 29, 1997.Subsequently, there was no further issuance of CIBmainly due to lack of response of market participantsfor the instrument. Taking into account the pastexperience as wel l as international ly popularstructure of CIBs, a modified structure of CIB isproposed to be re-introduced (Box VI.1).

Table 6.9: Issuance Calendar and Actual Borrowings during 2005-06(April 1, 2005 to September 30, 2005)

Borrowings as per Issuance Auction Calendar Actual Borrowings*

Period of auction Amount Maturity Period Date of Auction Amount Tenor of the(Rupees crore) of the Security (Rupees crore) Security (Years)

1 2 3 4 5 6

April 4-20, 2005 5,000 a) 10 to 14 year security April 5, 2005 5,000 6.98

3,000 b) 20- year and above April 5, 2005 3,000 27.39

April 19 -10,2005 5,000 a) 10 to 14 year security April 19, 2005 5,000 11.74

2,000 b) 20- year and above April 19, 2005 2,000 27.39

May 2-9, 2005 6,000 a) 5 to 9 year security May 3, 2005 6,000 5.03

4,000 b) 20- year and above May 3, 2005 2,000 29.27

May 16-24, 2005 4,000 a) 15 to 19 year security May 24, 2005 4,000 16.05

June 1-8, 2005 6,000 a) 5-9 year security June 6, 2005 6,000 8.86

4,000 b) 15-19 year and above June 6, 2005 4,000 15.98

June 16-24, 2005 8,000 a) 10-14 year security June 23, 2005 5,000 10.81

July 1-8, 2005 6,000 a) 5- 9 year security July 5, 2005 6,000 8.16

4,000 b) 15-19 year security July 5, 2005 4,000 15.90

July 12-18, 2005 5,000 (a) 15-19 year security July 18, 2005 5,000 15.86

August 5-12, 2005 5,000 (a) 10-14 year security August 11, 2005 5,000 11.43

3,000 (b) 20 year and above August 11, 2005 3,000 28.99

August 16--23, 2005 5,000 (a) 5-9 year security August 18, 2005 5,000 8.66

3,000 (b) 20 year and above August 18, 2005 3,000 28.98

September 2-10, 2005 5,000 (a) 10-14 year security

3,000 (b) 20 year and above

Total 83,000 73,000

* Up to August 18, 2005


7/14

158

ANNUAL REPORT

Capital Indexed Bonds (CIBs) minimise the inflation risk tothe investors and issuers by adjusting both the principal and

coupon payments to the changes in inflation. The CIBs are

a preferred investment vehicle for investors sensitive toinflation risk. From the issuers perspective, the CIB helps

in reducing cost of borrowing as it eliminates the inflationrisk premium.

Co-existence of CIBs and nominal bonds provides useful

information on inflationary expectations or break even

inflation rate to both the policy makers and the market

participants. The break-even inflation rate is defined as therate of return that equates the real yield of a CIB with the

rate of return of a nominal bond of the same tenor if both

are held till maturity.

The two most important issues relating to the design of aCIB are: (i) the selection of an inflation index and (ii) the

indexation process in the design to deal with indexationlag. Ideally, the CIBs should be linked to an inflation index

which is a perfect measure of inflation for all sections of

society and is available at high frequency without any

lag. In reality, there are several measures of inflation

applicable to particular sections of society, but none of

them meet the ideal conditions. Indexation lag arises from

(a) publication lag and (b) institutional lag. The publicationlag arises on account of some delay with which the inflation

data are published; the institutional lag, on the other hand,

may arise due to arrangements for trading and settlementof bonds between coupon payment dates. For a bond

offering semi-annual coupon payments, the indexation lagon account of institutional factor would be six months. As

the length of indexation lag has direct relationship with

Box VI.1

Capital Indexed Bonds

real value certainty or level of inflation protection, it isalways desirable to minimise indexation lag.

Internationally, there are two broad designs of indexed bonds

- the UK model and the Canadian model. While the UK modeltakes aggregated length of indexation lag as it is, the

Canadian model brings down the length of indexation lag

by eliminating institutional lag. Under the Canadian design,

the inflation indexed principal can be derived on a daily basis

by linear interpolation between the inflation index number

applicable for the first day of the month in which the

settlement falls and the inflation index number applicableto the first day of month immediately following the settlement

date. The uplifted principal over the base thus arrived is

used to calculate accrued interest on the CIBs for anyparticular date with indexation lag limited to the publication

lag. Considering the inherent superiority of the Canadian

model, many Treasuries the world over have used it to design

their inflation indexed securities. Prominent among them

are the United States, France, Sweden, South Africa, and

New Zealand.

References

1. Sack, B. and Robert Elsasser (2004), TreasuryInflation-Indexed Debt: A Review of the U.S

Experience, Federal Reserve Bank of New York

Economic Policy Review, May: 47-63.2. W il cox, Dav id W. (1998 ), Policy Watch: The

Introduction of Indexed Government Debt in the

United States, Journal of Economic Perspectives12,No.1 (Winter): 219-27.

When, as and if issued [also known as when-issued

(WI)] markets in Government securit ies function

somewhat like trading in a futures market in that positions

may be taken and covered many times before the actual

settlement date. Such trading takes place between the

time a new issue is announced and the time it is actually

issued. WI trading has certain advantages like facilitating

the distribution process for Government securities by

stretching the actual distribution period for each issue and

allowing the market more time to absorb large issues

without disruption. It helps price discovery by reducing

uncertainties surrounding auctions by enabling bidders

Box VI.2

When Issued Marketto gauge market demand and price the securities being

offered.

International experience suggests that the estimated

aggregate size of outstanding positions in the WI market

typically exceeds the quantity of securities to be sold at that

auction. Those positions can be taken more cheaply and

potentially in greater size (due to the lack of a delivery

requirement) during the WI trading than in subsequent

trading. Participants normally reduce the size of outstandingpositions in the WI market as the issue date approaches.

There is, however, the risk of participants overestimatingtheir ability to cover short positions prior to settlement.

VI.19 The Internal Technical Group on CentralGovernment Securities Market had recommended,inter alia, introduction of When Issued Market and

limited short selling in Government securities. Theserecommendations would be considered inconsultation with the Central Government (Box VI.2).


8/14

159


II. STATE GOVERNMENTS

Ways and Means Advances

VI.20 During 2004-05, the average utilisation ofspecial WMA, normal WMA and overdrafts by theState Governments was lower than the previous year(Chart VI.4). The improvement in the overall cashposition of the States was also reflected in the spurt

in investments in 14-day Intermediate Treasury Bills(Table 6.10).

VI.21 State Governments, excepting Kerala,Arunachal Pradesh, Mizoram, Nagaland, Tripura andUttaranchal resorted to WMA for a fewer number ofdays as compared with 2003-04 (Table 6.11). Therecourse to overdrafts by the State Governmentsalso showed improvement over the previous year.As many as 13 States did not avail overdrafts in2004-05.

VI.22 Effective April 1, 2005 the aggregate normalWMA of the State Governments, which is based onthe recommendations of the RamachandranCommittee, was revised upwards by 9.8 per cent.

The increase is due to the higher average revenuereceipts of the States in the preceding three years.The WMA limit for non-special category States wasrevised upwards by 9.4 per cent for the year 2005-06.In the case of special category States, there was anincrease of 13.5 per cent (Table 6.12). The AdvisoryCommittee on Ways and Means Advances to theState Governments (Ramachandran Committee;January 2003) had recommended that the formulaand the limits of WMA to State Governments maybe reviewed in total i ty after receipt of therecommendations of the Twelfth FinanceCommission (TFC). Accordingly, an Advisory

Committee on Ways and Means Advances to theState Governments was constituted in May 2005.

Table 6.10: WMA/Overdrafts and Investment of State Governments*

(Rupees crore)

Month Normal WMA Special WMA Overdraft Investment in 14-dayIntermediateTreasury Bills

2004-05 2003-04 2004-05 2003-04 2004-05 2003-04 2004-05 2003-04

1 2 3 4 5 6 7 8 9

April 1,118 989 1,908 2,145 1,075 1,088 5,585 3,894

May 1,044 941 2,177 1,816 560 445 5,917 4,987June 1,049 937 1,724 1,179 506 204 7,959 6,232

July 863 1,138 1,196 2,160 425 612 7,693 4,095

August 890 968 1,472 2,183 247 658 8,348 5,193

September 856 959 1,258 1,681 14 532 9,887 5,190

October 951 1,150 2,556 2,464 547 946 9,606 3,690

November 933 1,246 2,545 3,829 465 1,053 12,011 3,497

December 601 1,216 827 4,513 152 1,185 14,722 2,820

January 695 1,055 1,530 3,417 216 1,203 12,632 3,716

February 438 1,023 1,110 3,274 107 698 15,039 4,208

March 115 811 631 2,068 188 703 17,337 4,234

Average 796 1,036 1,578 2,379 375 777 10,561 4,313

* : Average of Friday outstandings.

Rupeescrore

Chart VI.4: Outstanding WMA and Overdrafts to States

April

May

June

July

August

S

eptember

October

November

December

January

February

March


9/14

160

ANNUAL REPORT

Table 6.11 State-wise Availment of WMA/Overdraft(Rupees crore)

State WMA Overdraft

2004-05 2003-04 2004-05 2003-04

Number of Number of Number of Number of Number of Number ofdays days Occasions days Occasions days

1 2 3 4 5 6 7

Non-Special Category States

1. Andhra Pradesh 0 173 0 0 6 30

2. Bihar 5 92 0 0 0 0

3. Goa 212 270 3 13 9 66

4. Gujarat 116 203 0 0 13 47

5. Haryana 0 24 0 0 4 21

6. Karnataka 7 196 0 0 1 1

7. Kerala 348 328 19 161 28 1968. Madhya Pradesh 110 261 0 0 22 176

9. Maharashtra 68 207 5 22 17 154

10. Orissa 91 315 0 0 21 189

11. Punjab 268 291 9 115 11 53

12. Rajasthan 21 303 0 0 21 151

13. Tamil Nadu 7 38 0 0 13 73

14. Uttar Pradesh 294 321 13 98 14 79

15. West Bengal 268 362 15 115 28 260

16. Chhattisgarh 0 0 0 0 0 0

17. Jharkhand 0 31 0 0 0 0

Special Category States

1. Arunachal Pradesh 35 0 3 6 0 0

2. Assam 225 337 13 126 24 315

3. Himachal Pradesh 159 327 4 27 27 181

4. Manipur 149 268 2 118 19 350

5. Meghalaya 0 31 0 0 1 1

6. Mizoram 147 131 1 1 4 24

7. Nagaland 103 12 3 18 19 143

8. Tripura 31 25 0 0 0 0

9. Uttaranchal 95 78 2 16 9 41

Market Borrowings

VI.23 The net market borrowings allocated to theStates for 2004-05 amounted to Rs.36,935 crore,including additional allocation of Rs.18,805 croreunder the DSS. Taking into account repayments ofRs.5,123 crore, the gross allocation amounted toRs.42,058 crore in 2004-05. As against this, grossmarket borrowings during 2004-05 by the StateGovernments were lower at Rs.39,101 crore. Anamount of Rs.16,943 crore was raised under the DSSduring 2004-05. The gross borrowing also includedan addit ional amount of Rs.1,387 crore forprepayment of loans from the NABARD under the

RIDF Scheme (Table 6.13).

VI.24 Of the total borrowings by States during

2004-05, 98 per cent was through sale of securitieson a tap basis (Table 6.14).

VI.25 Borrowings raised by way of auct ionsaggregated Rs.885 crore accounting for two per centof total borrowings (Table 6.15).

VI.26 The weighted average y ie ld o f S tateGovernment securities increased during 2004-05while the weighted average maturity declined to10.01 years in 2004-05 from 11.01 years in 2003-04.While the cut-off yield in the auctions rangedbetween 7.10-7.25 per cent, the coupon of the tap

issuances ranged between 5.60 and 7.36 per cent


10/14

161


(Table 6.16). The investor response to marketborrowings by some States was rather lukewarm in2004-05, reflecting both demand and supply sidefactors. The response to tap issues held in the year2004-05 was not encouraging (the tap issues closedwith shortfalls except on two occasions), thoughthere was surfeit of liquidity in the system. The spreadin the cut-off yields in the auctions also widened. In

this context, the need for improving the secondary

market liquidity in State Government securities hasreceived increasing attention.

VI.27 At end-March 2005, 60 per cent of the totaloutstanding debt of State Governments was in thematurity bucket of 6-10 years as compared with 54per cent as at end-March 2004 (Table 6.17).

VI.28 The maturity profi le of outstanding State

Government Securities and Power Bonds issued by

Table 6.12: Normal WMA Limits of States

(Rupees crore)

State WMA Limits WMA Limits WMA Limits WMA Limits WMA Limits WMA Limits1999 (effective 2001 (effective 2002 (effective 2003 (effective 2004 (effective 2005 (effective

March 1, 1999)$ February 1, 2001) Apr il 1, 2002) March 3, 2003)* April 1, 2004) Apr il 1, 2005)

1 2 3 4 5 6 7

Non-Special Category States

1. Andhra Pradesh 288 463 520 620 700 770

2. Bihar 195 220 245 305 340 380

3. Chhattisgarh 82 91 100 130 155 175

4. Goa 24 25 50 50 65 65

5. Gujarat 243 393 445 485 520 575

6. Jharkhand 51 57 75 105 175 225

7. Haryana 99 167 180 205 245 280

8. Karnataka 228 331 375 460 505 570

9. Kerala 144 215 225 270 315 345

10. Madhya Pradesh 221 244 275 345 395 420

11. Maharashtra 483 685 760 905 1,000 1,050

12. Orissa 141 159 185 215 250 270

13. Punjab 141 200 235 240 325 360

14. Rajasthan 202 288 310 365 405 440

15. Tamil Nadu 281 402 415 570 615 670

16. Uttar Pradesh 531 559 630 755 835 920

17. West Bengal 235 295 360 420 480 495

Sub Total 3,589 4,794 5,385 6,445 7,325 8,010

Special Category States1. Arunachal Pradesh 28 35 50 50 50 50

2. Assam 114 161 180 210 250 295

3. Himachal Pradesh 59 92 115 135 140 145

4. Manipur 25 38 50 50 50 55

5. Meghalaya 25 30 50 50 50 55

6. Mizoram 25 28 50 50 50 50

7. Nagaland 26 40 50 55 60 65

8. Tripura 31 46 55 60 70 80

9. Uttaranchal 19 19 50 65 95 130

Sub Total 352 489 650 725 815 925

Total 3,941 5,283 6,035 7,170 8,140 8,935

$: Report of the Informal Advisory Committee on WMA to State Governments, November 1998 (Chairman: Shri B. P. R. Vithal).

* : Advisory Committee on WMA to State Governments, January 2003 (Chairman: Shri C. Ramachandran).


11/14

162

ANNUAL REPORT

State Governments suggests that the repaymentburden for State Governments would be very highduring the period 2012-13 to 2014-15, reflecting highamount of borrowings during 2002-03 to 2004-05under the DSS (Table 6.18).

VI.29 The interest rate profile of the outstandingstock of the State Government securities shows that63 per cent of borrowings was contracted at interestrates ranging from 5.00 per cent to 9.99 per cent. The

share of total outstanding stock with interest rate

Table 6.13: Market Borrowings of State Governments in 2004-05

(Rupees crore)

State Gross Repayment Net Gross Gross GrossAllocation Allocation Amount Amount Borrowings

(=2 - 3) Raised Raised (=5 + 6)by Auction by Tap

1 2 3 4 5 6 7

1. Andhra Pradesh 3,312 438 2,874 3,312 3,312

2. Arunachal Pradesh 22 5 17 22 22

3. Assam 794 162 633 794 794

4. Bihar 1,890 330 1,560 1,890 1,890

5. Chhattisgarh 523 93 430 392 392

6. Goa 133 15 118 133 133

7. Gujarat 2,020 209 1,811 2,020 2,0208. Haryana 1,039 109 930 1,039 1,039

9. Himachal Pradesh 886 34 851 886 886

10. Jammu & Kashmir 474 58 416 474 474

11. Jharkhand 560 112 448 560 560

12. Karnataka 2,299 182 2,117 2,299 2,299

13. Kerala 1,672 296 1,376 356 1,316 1,672

14. Madhya Pradesh 1,730 256 1,474 1,730 1,730

15. Maharashtra 4,275 386 3,889 4,275 4,275

16. Manipur 83 14 69 83 83

17. Meghalaya 142 18 125 142 142

18. Mizoram 89 10 79 89 89

19. Nagaland 164 25 139 164 164

20. Orissa 1,199 299 900 1,199 1,199

21. Punjab 1,830 171 1,659 1,831 1,831

22. Rajasthan 2,391 314 2,077 2,391 2,391

23. Sikkim 48 12 36 48 48

24. Tamil Nadu 2,599 350 2,249 270 2,329 2,599

25. Tripura 251 18 233 251 251

26. Uttar Pradesh 6,887 748 6,139 4,060 4,060

27. Uttaranchal 309 40 269 309 309

28. West Bengal 4,439 421 4,017 259 4,180 4,439

Total 42,058 5,123 36,935 885 38,217 39,101

above 10 per cent declined to 37 per cent from 47per cent in the previous year (Table 6.19).

Working Group to Frame the Model FiscalResponsibility Legislation at State Level

VI.30 In the twelfth Conference of State FinanceSecretaries held on August 1, 2003, it was decidedthat the Reserve Bank would provide technicalassistance in the preparation of a model fiscal

responsibility legislation for the State Governments.


12/14

163


Accordingly, a Group was constituted in October2003 with select Finance Secretaries of State

Governments and a representative of the

Table 6.14: Market Borrowings Raised through Tap Issuance(Rupees crore)

State Tap Issue

Apr. 11, May. 26-27, Jul. 28-29, Nov.2-3, Dec. 7-8, Jan.10-11, Feb .22-23, Mar. 14-15,2004, 2004, 2004, 2004, 2004, 2005, 2005 2005

5.60%# 5.70%# 6.35%* 7.36%# 7.32% * 7.02%# 7.17** 7.20**

1 2 3 4 5 6 7 8 9

1. Andhra Pradesh 732 591 532 735 321 354 47 0

2. Arunachal Pradesh 9 0 0 9 5 0 0 0

3. Assam 220 110 50 137 174 69 34 0

4. Bihar 359 265 152 266 309 213 327 0

5. Chhattisgarh 154 107 0 0 132 0 0 0

6. Goa 67 0 0 39 26 0 0 0

7. Gujarat 319 740 509 283 169 0 0 0

8. Haryana 205 271 212 166 99 86 0 0

9. Himachal Pradesh 208 174 155 158 85 90 16 010. Jammu & Kashmir 54 107 65 42 36 45 125 0

11. Jharkhand 125 130 98 75 117 16 0 0

12. Karnataka 550 435 392 365 296 261 0 0

13. Kerala 330 396 221 0 0 42 327 0

14. Madhya Pradesh 350 247 401 342 290 100 0 0

15. Maharashtra 611 1,145 701 427 348 137 520 386

16. Manipur 34 0 0 44 0 2 3 0

17. Meghalaya 41 0 0 47 0 3 52 0

18. Mizoram 16 0 0 17 10 0 0 47

19. Nagaland 62 0 43 34 21 2 2 0

20. Orissa 313 175 133 169 218 0 191 0

21. Punjab 211 512 596 0 0 293 219 0

22. Rajasthan 513 495 393 505 217 268 0 023. Sikkim 6 0 0 11 6 0 25 0

24. Tamil Nadu 581 723 443 450 0 133 0 0

25. Tripura 42 0 0 40 22 2 146 0

26. Uttar Pradesh 775 735 514 367 1,144 492 32 0

27. Uttaranchal 209 0 0 67 33 0 0 0

28. West Bengal 406 1,113 681 289 183 542 966 0

Total 7,500 8,471 9,288 5,084 4,261 3,148 3,031 433

*: Tenor : 9 years. **: Tenor :12 years. #: Tenor : 10 years.

Government of India, Ministry of Finance, asmembers. The Report of the Group was submitted

on January 22, 2005. As decided in the 14 th

Table 6.15: Market Borrowings Raised in Auctions

(Amount in Rs. Crore/rate in per cent)

Sr. State Date of Notified Market No. of Amount Amount Weighted Cut-off SpreadNo. Auction Amount Rate* Bids Offered Raised Average Rate (%) (Col. 5 -

Received Yield (%) Col. 10)

1 2 3 4 5 6 7 8 9 10 11

1 Kerala 24.08.04 356 6.32 24 485.35 355.66 7.16 7.25 0.93

2 Tamil Nadu 24.08.04 450 6.32 38 757.85 270.00 7.05 7.10 0.78

3 West Bengal 24.08.04 380 6.32 31 599.0 259.00 7.08 7.15 0.83

* : Yield on Central Government 10-year dated security.


13/14

164

ANNUAL REPORT

Conference of State Finance Secretaries

VI.31 During 2004-05, the 14th and 15th conferenceswere held on August 13, 2004 and January 24, 2005respectively. In the 14th Conference, issues relatingto market and other borrowings of State Governments,policy for identifying durable surplus for investment,improving secondary market l iquidity of StateGovernment Securities and draft Report of theWorking Group on the Model Fiscal ResponsibilityLegislation at State Level were discussed. It was alsodecided in the Conference to form two WorkingGroups with representatives from select StateGovernments for (i) improving secondary marketliquidity of State Development Loans and (i i) devisinga methodology of compilation of data on various typesof debt liabilities of the States.

Table 6.17: Maturity Profile of Outstanding StateGovernment Securities (At end-March 2005)

Percentage to total amount outstanding Total

State 0-5 6-10 Above 10Amount

years years yearsOutstanding

(Rs. crore)

1 2 3 4 5

1. Andhra Pradesh 29.7 64.9 5.4 19,964

2. Arunachal Pradesh 15.0 48.1 36.9 2793. Assam 30.7 59.1 10.3 5,129

4. Bihar 32.2 55.4 12.3 11,803

5. Chhattisgarh 72.1 27.9 1,744

6. Goa 27.1 59.2 13.6 961

7. Gujarat 22.4 65.3 12.3 12,657

8. Himachal Pradesh 15.2 72.8 12.0 3,690

9. Harayana 26.3 62.1 11.6 4,755

10. Jammu & Kashmir 21.4 66.5 12.1 2,693

11. Jharkhand 86.9 13.1 1,971

12. Karnataka 23.8 62.8 13.4 11,762

13. Kerala 33.0 56.1 11.0 9597

14. Maharashtra 21.3 57.8 20.9 17,544

15. Madhya Pradesh 32.3 54.4 13.3 10,341

16. Manipur 27.8 47.3 24.9 598

17. Meghalya 33.3 46.7 20.0 825

18. Mizoram 24.9 51.7 23.3 501

19. Nagaland 32.5 54.9 12.6 1,237

20. Orissa 34.0 50.0 16.1 9,581

21. Punjab 23.4 62.0 14.6 7,718

22. Rajasthan 29.0 60.7 10.3 14,358

23. Sikkim 50.0 28.9 21.1 332

24. Tripura 26.8 44.1 29.1 1,025

25. Tamil Nadu 26.8 64.3 8.9 13,786

26. Uttaranchal 78.6 21.4 2,812

27. Uttar Pradesh 34.9 52.7 12.4 27,051

28. West Bengal 21.5 58.7 19.8 18,728

Total 27.0 59.6 13.4 2,13,443

Table 6.18: Maturity Profile of OutstandingState Government Securities and Power Bonds

(At end-March 2005)

(Rupees crore)Year State Loans Power Bonds Total

Outstanding

1 2 3 4

2005-06 6,274 0 6,274

2006-07 6,551 1,494 8,045

2007-08 11,555 2,989 14,544

2008-09 14,400 2,989 17,389

2009-10 16,511 2,989 19,500

2010-11 15,870 2,989 18,859

2011-12 22,032 2,989 25,021

2012-13 30,628 2,989 33,617

2013-14 32,078 2,989 35,067

2014-15 33,385 2,989 36,3732015-16 13,462 2,989 16,451

2016-17 10,697 1,494 12,191

Total 2,13,443 29,886 2,43,329

Table 6.19: Interest Rate Profile ofOutstanding State Government Securities

(At end-March 2005)

Range of Interest Rate Outstanding Amount Percentage to(per cent) (Rupees crore) Total

1 2 3

1. 5.00-5.99 34,612 16.22

2. 6.00-6.99 58,563 27.44

3. 7.00-7.99 27,872 13.06

4. 8.00-8.99 8,004 3.75

5. 9.00-9.99 5,412 2.54

6. 10.00-10.99 14,563 6.82

7. 11.00-11.99 17,062 7.99

8. 12.00-12.99 25,362 11.88

9. 13.00-13.99 15,720 7.37

10.14.00 6,274 2.94

Total 2,13,443 100

Table 6.16: Weighted Average Yield of StateGovernment Securities

(per cent per annum)

Year Range Weighted Average

1 2 3

1995-96 14.00 14.001996-97 13.75-13.85 13.83

1997-98 12.30-13.05 12.82

1998-99 12.15-12.50 12.35

1999-00 11.00-12.25 11.89

2000-01 10.50-12.00 10.99

2001-02 7.80-10.53 9.20

2002-03 6.60-8.00 7.492003-04 5.78-6.40 6.13

2004-05 5.60-7.36 6.44

2005-06 (up to Aug. 12, 05) 7.32-7.77 7.66

Conference of State Finance Secretaries held onAugust 13, 2004 the Report of the Group has beenplaced on the Reserve Banks website.


14/14

165


VI.32 In the 15th Conference held on January 24,2005 the deliberations focused on issues such asmarket borrowings of State Governments,

presentation on the Working Group on StateGovernment Liabilities and review of the working ofthe State Finance Secretaries Conferences. Aninterface with the Indian Banks Association was alsoorganised to deliberate upon the issues relating todefault and restructuring/unilateral alteration in thefinancial terms of SLR State Government guaranteedbonds issued by State Government entities.

VI.33 The 16 th Conference of State FinanceSecretaries was organised on April 8, 2005 to deliberateexclusively on the recommendations of the TwelfthFinance Commission (TFC) and operational issues

emanating therefrom. Dr. C. Rangarajan, Chairman, TFCand Chairman, Economic Advisory Council to the PrimeMinister, delivered the inaugural address.

Technical Advisory Committee

VI.34 During 2004-05, three meet ings of theTechnical Advisory Committee (TAC) on Money,Foreign Exchange and Government SecuritiesMarkets were held. In the meeting held on May 31,2004 issues such as liquidity aspects of StateGovernment securities, eligibility of corporates in the

repo market, permission to banks to trade in exchangetraded derivatives and operational issues of Deliveryversus Payment (DvP) III were discussed. In themeeting held on September 17, 2004, the futurecourse of action on OTC derivatives, permission tobanks to trade in exchange traded derivatives andissues for further development in the commercialpaper market were discussed. It was also decided toconstitute two Sub-Groups. The Group under thechairmanship of Shri D. N. Ghosh was set up torecommend the steps to be taken in order to allowbanks to trade in Interest Rate Futures (IRFs) and toharmonise regulatory norms between Over theCounter (OTC)/exchange traded derivatives and alsobetween rupee denominated/cross currency

derivatives involving rupee in one leg. A WorkingGroup on Liquidity of State Government Securitieswas set up to examine the modalities of improving

the secondary market liquidity of State DevelopmentLoans. In the 21st meeting of the TAC held on January18, 2005 recommendations of the Sub-Group onPrimary Dealers System in India - Issues andProspects were discussed. A review of benchmark inregard to prudential limits in call/ notice money marketand of the system of liquidity support to gilt mutualfunds was also undertaken. In the 22nd meeting ofthe TAC held on April 12, 2005 draft reports of theTechnical Groups on Money Market, CentralGovernment Securities Market, and Forex Marketswere discussed. These reports have been placed on

the Banks website.

Outlook

VI.35 The market borrowing programme of theCentral Government during 2005-06 is budgeted tobe much higher than in the previous year.Furthermore, the interest rate cycle is turning upinternationally. The Reserve Bank expects to conductdebt management within the monetary projections setout in the Annual Policy Statement for 2005-06consistent with the objectives of minimisation of costand rollover risk. The reintroduction of capital indexed

bonds is expected to widen the choice for investorswhi le lowering the cost of borrowings to theGovernment in the long run. The initiatives by theReserve Bank towards further deepening andwidening the Government securities market withinnovative instruments and new participants wouldpave the way for healthy and smooth conduct of debtmanagement and borrowing requirements. The stepstaken towards improving the l iquidity of StateGovernment loans are expected to ease hurdlesencountered by State Governments in their accessto the market. State Governments efforts towardsensuring sustainability of debt position will be anabiding concern of the Reserve Bank in the conductof public debt management operations in 2005-06.

Date post:	29-May-2018
Category:	Documents
Upload:	stefpri
View:	219 times
Download:	0 times

[India] CIBs

Documents