19th OECD Global Forum on Public Debt Management –

Session II: Urgent Policy Challenges for Asian Debt Managers

A Case Study of India

A.K.Mitra

Structure Of Presentation

I. Fiscal Situation

II. Financing of Fiscal Deficit – Role of Market Borrowings

III. Policy Challenges in Debt Management

IV. Financial Crisis -Instruments and Investors in Government Securities Market

V. Recent developments in Infrastructure in Government Bond Market

I. Fiscal Situation

Table: Key Fiscal Indicators –Before & During Crisis

Year Primary

Deficit

Revenue

Deficit

Gross

Fiscal

Deficit

Outstanding

Liabilities*

1 2 3 4 5

2007-08 -0.9 1.1 2.7 60.1

2008-09 -2.6 4.6 6.2 58.9

2009-10 3.0 4.8 6.8 59.7

2007-08 -0.6 -0.9 1.5 27.8

2008-09 0.7 -0.1 2.7 27.1

2009-10 1.4 0.6 3.4 27.5

2007-08 -1.3 0.2 4.2 75.1

2008-09 3.5 4.4 8.9 74.7

2009-10 4.5 5.5 10.2 76.6

Table : Key Fiscal Indicators

(Per cent to GDP)

Centre

States

Combined

Debt-GDP Ratio

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

Centre States Combined

II. Financing of Fiscal Deficit – Role of Market Borrowings

Share of Market Borrowings in GFD Financing

0.0

20.0

40.0

60.0

80.0

100.0

Centre States Total

Market Borrowings (per cent of GDP)

0.0

2.0

4.0

6.0

8.0

10.0

Centre States Total

Share of General Government Borrowings to Savings

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Net Market Borrowings/Household Financial Savings GFD/Gross Domestic Savings

Rolling Targets for Fiscal Indicators (per cent to GDP)

2007-08 2008-09 (RE) 2009-10 (BE) 2010-11 2011-12

Revenue Deficit 1.1 4.4 4.8 3 1.5

Fiscal Deficit 2.7 6 6.8 5.5 4

Outstanding Liabilities 60.1 58.9 59.7 60.1 57.2

III. Challenges in Debt Management

12

Government Securities Market: A Snapshot

Item 1991-92 1995-96 2001-

02

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

Outstanding Market Loans (Rs. in

billion) 780 1640 5165 7080 7590 8624 9728 10925 15,129

Outstanding Market Loans as ratio

of GDP 13% 15% 25% 28% 26% 26% 26% 25% 28%

Average maturity of the securities

issued during the year (in Years) -- 5.7 14.3 14.94 14.13 16.9 14.72 14.9 13.8

Weighted average cost of the

securities issued during the year

(%) 11.78 13.77 9.44 5.71 6.11 7.34 7.89 8.12 7.69

Minimum and maximum

maturities of stock issued during

the year (in Years) N.A. 02-10 5-25 4-30 5-30 5-30 4-30 6-29 4-30

PD share in the secondary market

turnover -- 22.0 24.3 26.7 24 21.3 16.1 22.2

Commercial Banks39%

Insurance Companies23%

Primary Dealers8%

Mutual Funds1%

Co-operative Banks3%

Financial Institutions0%

Corporates4%

FIIs0%

Provident Funds7%

RBI11%

Others4%

Holder Profile in Central Govt securities as on end June 2009

Source: RBI’s Monthly Bulletin

Financing Fiscal Stimulus – Dated Securities Calendar (Rs. billion)

2007-08 2008-09 2009-10 2008-09 2009-10

1st Half 970 1060 2950 9.3 178.3

2nd Half 590 390 1230

Three addl. Calendars - 1160

2nd Half (total) 590 1550 1230 162.7 -21.6

From the Market 1560 2610 4180 67.3 60.2

MSS desequestering 0 120 330

Total 1560 2730 4510 75.0 65.2

Net Borrowings 1107 2290 3980 106.9 73.8

Variation (%)

New issuances

• 2007-08

– Out of 33 issues, one security (10-year)

• 2008-09

– Out of 56 issues, 4 securities (one 6-year, two 10-year, and one 30-year)

• 2009-10 (up to November 9)

– Out of 81 issues, 6 securities (two 5-year, one 6-year, one 7-year, one 10-year and one 15-year)

Auction Format

• Central Government dated securities -switched to Uniform Price Auction (UPA) since March 26, 2009

• Bid-cover ratio declined in 2009-10 partly reflecting market fatigue

• Sub-national issues and Treasury Bills continue to be on MPA basis

Deviation from Calendar

• 3 additional calendars issued during 2008-09 H2 to fund fiscal stimulus

• Maturity was lowered on a few occasions taking into account market conditions, particularly demand from commercial banks vis-à-vis insurance companies and pension funds

Bid-Cover Ratio

Yield and Turnover

5

5.5

6

6.5

7

7.5

8

8.5

9

9.5

,0

5,000

10,000

15,000

20,000

25,000

Average Turnover Average 10-year Yield

10-year Yield

Yield Curve

3.75

4.75

5.75

6.75

7.75

8.75

9.75

10.75

1 4 7 10 13 16 19 22 25 28

31-Mar-09 31-Aug-08 31-Oct-09

Cost of Borrowings - Centre

Nominal GDP Growth and Cost of Market Borrowings of Centre

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

RoG GDPMP Weighted Avg. Rate of Interest on Centre's Market Borrowings

Yield and Maturity - Centre

• Weighted Average Yield declined for the 1st

time in 5 years in 2008-09

Outstanding Stock

WAY WAM WAY WAM

2004-05 6.11 14.13 8.79 9.63

2005-06 7.34 16.90 8.75 9.92

2006-07 7.89 14.72 8.55 9.97

2007-08 8.12 14.90 8.5 10.59

2008-09 7.69 13.81 8.23 10.45

2009-10^ 7.14 11.01^ up to October

Issued during the Year

Maturity Distribution

Residual Maturity 2007-08 2008-09 2009-10

Less than 5 years 0 5.7 12.0

5 - 9.99 years 51.3 51.0 43.7

10-14.99 years 21.7 10.7 23.4

15-19.99 years 0 5.4 8.4

20 years & above 28.0 27.2 12.6

Weighted Avg. Maturity 14.9 13.8 11.0

Operation of PDs

19 PDs in operation, of which 11 are banks Morgan Stanley India Primary Dealer Pvt. Ltd and Nomura Fixed

Income Securities Pvt. Ltd. were given authorization to undertake Primary Dealership with effect from July 20, 2009 and September 7, 2009 respectively.

Absorbed 42% of primary issues of Centre’s dated securities in 2008-09

Turnover - outright at 18.7% (19.5% in 07/08) and repo at 11.2% (15.4%) for stand-alone PDs

Underwriting shifted to PDs from RBI (post FRBM) Underwriting Commission paid to PDs increased After increasing to Rs.108 billion (4.1% of Rs.2,610 billion) in

2008-09 from Rs.9.6 billion (0.6% of Rs.1560 billion) in 2007-08, devolvement on PDs declined to Rs.70 billion (2.1% of Rs.3,340 billion during 2009-10 up to Nov. 9)

Table: Comparison of underwriting cut-off fees accepted

Unconventional Measures

• MSS desequestering (Details in Session III)

• MSS buy-back (Details in session III)

• Open Market Operations (Details in session III)

IV. Instruments and Investors in Government Securities Market

Investments by FIIs

• “Calculations about the sustainability of debt must also take into account more than just its size relative to GDP. As a rule, countries that issue debt in their own currency to their own citizens are less vulnerable than those that must sell bonds in foreign currencies or that depend heavily on foreign lenders. Emerging economies, which have usually borrowed from abroad, have often faced crisis with debt burdens of less than 60 % of GDP.” (Economist, June 13, 2009)

• The time honoured principles for opening up of debt markets to foreign investment are (a) convergence in nominal and real interest rates on sustainable basis, (b) low debt/GDP ratio and (c) low fiscal deficit to GDP ratios on a consistent basis.

• India does not issue sovereign bonds abroad.• Ceiling on FII investments in Rupee securities amount to 1.5 per cent of

the outstanding stock of the Central Government securities (USD 5.0 billion in May 2008)

• Post crisis, the level of utilization as a proportion of limits decreased from 68. 9% as on 3rd October 2008 to 35.8% as on 1st May 2009 reflecting deleveraging by FIIs

Composition of Instruments of Market Borrowings: FRBs

• Entire market borrowings conducted through fixed coupon rupee securities during 2005-06 to 2009-10 (up to November 15)

• Fixed coupon rupee securities: 97.5% of outstanding stock

• FRBs - last issued in 2004.• Outstanding share of FRBs: 2.5% • Floating rate bonds will be issued this fiscal

depending upon the market conditions and market appetite

V. Developments in Infrastructure of Government Bond Market

Auction Process of Government Securities

• Recent initiatives have improved the efficiency of the auction process by reducing the time taken for announcement of the auction results, thereby enhancing trading time

• The period for submission of competitive bids reduced to 2 hours (10-30 AM – 12.30 PM) and for non-competitive bids to 1 hour (10.30-11.30)

• Facility of bidding in physical form has been withdrawn and submission of bids is only through the automated electronic auction platform in Negotiated Dealing System (NDS)

• Submission of a single consolidated bid on behalf of all its constituents by the bank/PD in respect of non-competitive bids, have been implemented with effect from May 22, 2009

Secondary Market reforms

• Trading Platforms

– OTC ( reporting on NDS)

– Electronic screen based anonymous order matching system – NDS OM

• Enhance the trading efficiency

– Now covers all mandated entities

– Odd lot trading activated ( <5 cr)

– Gilt account route activated

– Retailing of Government securities

Process Flow Chart – Clearing and Settlement of G Sec Transactions

Data Dissemination – OTC trades (RBI website)

Data Dissemination – Order Matching trades (RBI website)

• DvP III settlement in government securities since 2004• FRBM precludes RBI from participating in primary

auctions• To make the auction successful, the markets needed to

be more liquid, broad based and efficient– Revamping the PD system - 2006– Permitting short sale – since 2006– Introduction of ‘WI’ trading since 2006– Active consolidation– STRIPS (2009-10)– Interest rate swaps (1999) and IRFs (2003, revamped in

2009)

Other Reforms

Thank You!