Public Debt & Primary Dealers Etc. Nov 22 (1)

8/3/2019 Public Debt & Primary Dealers Etc. Nov 22 (1)

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PUBLIC DEBT INDIAN CONTEXT


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Government Debt (also known as Public Debt, NationalDebt) is money (or credit ) owed by a central government.

Government debt is an indirectdebtofthetaxpayers.

Government debt can be categorized as internal debt (owed

to lenders within the country) and external debt (owed to

foreign lenders).


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Reserve Bankof India administers andmanagesthe Public

Debt Operationsofthecountry andconductstheissue andservicing ofnewloansofthe Central and State

Governments, primarily Dated Securities,throughits Public

Debt Offices (PDO).

To accomplishthetaskofadministration andmanagementofinternaldebt,RBI had a decentralizedsystemof

operationsthrough 15 Public Debt Officesestablished at 14

centres.

WiththecomputerizationofPublic Debt Office-cum-

Negotiated Dealing System (PDO-NDS),the PDO systemnowoperates as anintegratedvirtualcentralizedsystem.


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Public Debt Management

Processofformulating andexecuting a strategy formanagingthe governmentsdebttoraisetherequired amountof

funding,withinthe ambitofcost/riskobjectives.

Public Debt Management alsoencompassesotherfunctions

such ascash andliquidity managementofCentral and Stategovernments as alsothedevelopmentofa liquid anddeep

marketforgovernmentsecuritieswhichwillfacilitatethecost

reductionsofpublicdebt.


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Primary Dealership (PDs) System

System of Market Intermediaries 1996

Objectives

1.Supporting the market borrowing programme of the

Government,

2.Strengthening the securities market infrastructure and

3. Improving the secondary market liquidity inGovernment Securities.

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PDs - Responsible for ensuring the success of primary

auctions.

PDs - Given privileges in terms of provision of current

account and SGL facilities with RBI & Access to the

liquidity adjustment facility (LAF) ofRBI.

Section 21A RBI Act 1934 A State entrusts its banking

business to RBI by voluntarily entering into anagreement.

23 States enter into such agreements with RBI to

undertake general banking business in India, including

payments, receipts, collection, remittance of money,

management ofpublic debt and issue of new loans.

Jammu & Kashmir & Sikkim Agreements with the RBI

only for the limited purpose of managing their public

debt.

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Ways and Means Advances

Section 17(5) ofRBI Act, 1934 - RBI provides Ways andMeans Advances (WMA) tothe Statesbanking with it to

help them to tideovertemporary mismatchesin the cash

flow of their receipts and payments. Such advances, arerepayableineachcasewithin 3 months.

WMA- 2 Types Normal and Special.Normal WMA - Clean Advances.

Special WMA - Secured Advances (against the pledge of

GOI dated securities).

Operative limit for special WMA for a State is subject to its

holdings of GOI dated securities up to a maximum of limitsanctioned. RBI determines limits for normal and special

WMA for each State. Limits revised periodically.

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Any amount drawn by a State inexcessofWMA is an

overdraft.

No State allowed to run an overdraft with RBI for more than 10continuous working days. RBI & its agencies stop payments

on behalf of the State, if this period is exceeded.

Position of WMA actually utilised & overdrafts of various States

is closely monitoredin the Internal Debt Management Cell(IDM Cell), RBI, on a daily basis on receipt of the position from

Central Accounts Section (CAS), RBI, Nagpur.

When a State avails of WMA in excess of75% of the

aggregate limit (aggregate = normal plus operative limit for

special WMA), the State is cautioned to take remedialmeasures to avoid overdraft in its account.

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The interest rate charged on WMA and overdrafts at present

are the Bank Rate (9%) and the Bank Rate plus two

percentage points (11%), respectively

Surplus Investments

RBI Sole Agent for investment of the State's surplus funds.

Surplus cash balance of a State beyond a level indicated by it

is automatically invested in 14-day intermediate T-bills, on

which, the rate of interest at present is 6%. The States are

also free to participate in 14-day and 91-day T-bills auctions as

non-competitive bidders for investment of their durable

surplus.

.

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RBI & Government's Banking Transactions

Section20oftheRBI Act 1934 (the Act)

RBI has the obligation to undertake the receipts and payments of the

Central Government and to carry out its exchange, remittance and other

banking operations, including the management of public debt of the

Union.

Section21 - RBI also has the right to transactGovernmentbusiness

of the Union of India.

Section21A - State Government transactions carried out by RBI in

terms of the agreement entered into with the respective StateGovernments.

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Reserve BankofIndia - BankertoGovernment

RBI maintains the Principal Accounts ofCentral as well as StateGovernments at its Central Accounts Section, Nagpur.

RBI has a well structured arrangement for revenue collection as

well as payments on behalf of the Government across the country.

A network comprising the Public Accounts Departments ofRBI and

branches of Agency Banks appointed underSection 45 of the Act

carries out the Government transactions.

At present, all the public sector banks and three private sector

banks viz. ICICI Bank Ltd., HDFCBank Ltd. and Axis Bank Ltd. actas RBI's agents.

Only authorised branches of Agency banks can conduct

Government business.

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Government Security - A tradable instrument issued by the

Central or the State Governments. It acknowledges the

Governments debt obligation.

Such securities are short term (T-bills, with original maturities of

less than one year) or long term (Government bonds or dated

securities with original maturity of one year or more).

CentralGovernmentissuesboth, T-bills andbondsordatedsecurities.

StateGovernmentsissueonly bondsordatedsecurities,

which arecalledthe State Development Loans (SDLs).

G-Secs arecalledrisk-free gilt-edgedinstruments.

Government of India also issues savings instruments (SavingsBonds, NSCs, etc.) or special securities (Oil bonds, FCI

Bonds, FertiliserBonds, PowerBonds, etc.). These arenot

fully tradable and arenoteligibletobe SLRsecurities.

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T-Bills- Money marketshorttermdebtinstrumentsissuedby

GOI in three tenors, viz. 91 day, 182day and 364 days.

T-Bills - Zero Coupon Securitiesand pay nointerest. Issued ata discount and redeemed at the face value at maturity.

RBI conducts auctions usually every Wednesday to issue T-bills.

Payments for the T-bills purchased are made on the following

Friday.

91 day T-Bills -Auctioned on every Wednesday.

182 days and 364 days T-Bills -Auctioned on alternate

Wednesdays. RBI releases an annual calendar ofT-bill issuances

for a financial year in the last week of March of the previousfinancial year.

RBI announces the issue details ofT-bills through a press release

every week.

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Cash Management Bills (CMBs)

GOI, in consultation with RBI, has decided to issue a new

short-term instrument, known as Cash Management Bills

(CMBs), tomeetthetemporary mismatchesinthecash

flowoftheGovernment.

The CMBs have the generic character ofT-bills but are

issuedformaturitieslessthan 91 days.

Like T-bills, they are also issued at a discountand

redeemed at face value at maturity.

The tenure, notified amount and date of issue of the CMBs

depends upon the temporary cash requirement of the Govt.

Announcement of auction made by RBI through a Press

Release, issued one day prior to the date of auction.

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DatedGovernment Securities (G-Secs)

DatedG-Secs arelong termsecuritiesand carry a fixed or

floating coupon (interest rate) which is paid on the face value,

payable at fixed time periods (usually half-yearly). Thetenorof

datedsecuritiescanbe up to 30 years.

The Public Debt Office (PDO) ofRBI acts as the registry /depository of Government securities and deals with the issue,

interest payment and repayment of principal at maturity. Most of

the dated securities are fixed coupon securities.

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INSTRUMENTS

FixedRate Bonds Bonds on which the coupon rate is

fixed for the entire life of the Bond.

Floating Rate Bonds Floating Rate Bonds are securities

which do not have a fixed coupon rate. The coupon is re-set

at pre-announced intervals (say, every six months or one

year) by adding a spread over a base rate.

Zero Coupon Bonds Bonds with no coupon payments.

Capital Indexed Bonds Bonds, the principal of which is

linked to an accepted index of inflation with a view to

protecting the holder from inflation.

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Bondswith Call/ Put Options Bonds issued wherein the issuer can

have the option to buy-back (call option) or the investor can have the

option to sell the Bond (put option) to the issuer during the currency of

the Bond.

Government Security (G-sec) -A security created and issued by the

Govt. for the purpose of raising a public loan or any other purpose asnotified in the Official Gazette.

FormsofG-secs

1. Government Promissory Note (GPN) payable to or to the order of a

certain person; or

2. Bearer bond payable to a bearer; or

3. A Stock; or

4. A Bond held in a Bond Ledger Account (BLA).


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Special Securities GOI also issues, from time to time, special securities

to entities like Oil Marketing Companies, FertilizerCompanies, the Food

Corporation of India, etc. as compensation to these companies in lieu ofcash subsidies.

STRIPS - Separate Trading ofRegistered Interest and Principalof

Securities.

Basically "zero-coupon" securities where the investor receives a payment

at maturity only.

STRIPS allow investors to hold and trade the individual interest and

principal components of eligible G-Secs as separate securities of varying

tenure.

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State Development Loans (SDLs)

State Governments also raise loans from the market.

SDLs aredatedsecuritiesissued through an auction similar

to the auctions conducted for dated securities issued by GOI.

Interest at half-yearly intervals and the principal repaid on thematurity date.

SDLs issued by the State Governments qualify forSLR.

They are also eligible as collaterals for borrowing through

market repo as well as borrowing by eligible entities from the

RBI under the Liquidity Adjustment Facility (LAF).


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Gilt Funds,are mutualfundschemesfloated by assetmanagement companies with exclusiveinvestmentsingovernmentsecurities.

TheGovernment Securities Act,2006 -Act to consolidate

and amend the laws relating to G-Secs and its management

by RBI and for relative matters.

Government SecuritiesRegulations,2007 - Framed by

RBI to carry out the purposes of the G S Act.

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RBI provides certain facilities to encourage gilt funds

to create a wider investor base for governmentsecurities market.

1. Liquidity Support: The objective of extending

liquidity support to dedicated gilt funds is to support

short-term liquidity requirements of such mutual funds.

The Reserve Bank of India provides liquidity support togilt funds by way of reverse repurchase agreements

(reverse repos).

2. SGL & Current Accounts:RBI opens one

subsidiary general ledger (SGL) account and one

current account for gilt funds' own transactions at all

centers ofRBI wherever desired by the gilt funds.

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3. Funds TransferFacility: The gilt funds are given the facility of

transfer of funds from one center to another under the RBI

Remittance Facility Scheme . Also given the facility of clearing ofcheques arising out of government securities transactions,

tendered at the RBI counters.

4. Accessto Call Market: Gilt funds can access the call money

market as lenders.

5.Ready Forwards:RBI also recommends to GOI to permit the

gilt funds to undertake ready forward transactions in G-Secs

market. Such contracts may be undertaken only in i) dated

securities and T-Bills issued by GOI and ii) dated securities

issued by the State Govts.

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AdvantagesofInvestment InG-Secs

1. Provide income by way of interest.

2. Offer maximum safety as they carry the Sovereigns commitment

for payment of interest and repayment of principal.

3. They can be held in Demat Form, obviating the need for

safekeeping.

4. Available in a wide range of maturities - from 91 days to

as long as 30 years to suit the duration of a bank's liabilities.

5. G-secs can be sold easily in the secondary market to meet

cash requirements.


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AdvantagesofInvestmentinG-Secs-Contd.

6. G- secs can be used as collateral to borrow funds in the Repo market.

7. Settlement system for trading in G-secs, based on Delivery versus

Payment (DvP), is very simple, safe and efficient. The DvP

mechanism ensures transfer of securities by the seller of securities

simultaneously with transfer of funds from the buyer of the securities,

mitigating the settlement risk.

8. G- secs prices are readily available due to a liquid and active

secondary market and a transparent price dissemination mechanism.


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END OF PRESENTATION

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Public Debt & Primary Dealers Etc. Nov 22 (1)