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FMI (TERM IV) 2016

GOVERNMENT
SECURITIES
MARKET
Dr. Kulbir Singh
(IMT-Nagpur)
Lecture Objectives
Features of Government Securities
Modalities of Borrowing
Measures of Reform in Govt. Securities Market
Impact of Reforms in meeting fiscal deficit of Govt. and
liquidity in market.

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Learning Outcomes
Explain the features of various govt. securities and
governments borrowing modalities.
Explain the process of issue and role of RBI, and other
institutions and participants
Understand the role of G-Sec in financing of fiscal deficit
Understand the role of secondary market transactions of
G-Sec in maintenance of liquidity in financial system
Understand the movement towards a more diversified
and efficient G-Sec market.

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Preview of Government Securities Market
An important segment of financial market
Creating a Interest rate benchmark for the borrowing
programme in the private corporate sector and
Sub-serving the objectives of both the fiscal policy and the
monetary policy.
Instruments: T-Bills and Dated Securitiesboth
meeting the fiscal deficit of the government
Sometimes T-Bills are converted into dated securities in
order to allow a rollover of short-term debt on to a long-
term period.

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Preview of Government Securities Market
From Monetary Policy perspective, both instruments
along with their secondary market transactions
influences liquidity in financial system
which in turn influences the rate of interest
the propensity to invest
helps determine the income and output in the country.
What is the controversy around REXIT?

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Features of Central Government Securities.T-Bills
TBs are issued by RBI on behalf of Govt.
min. of Rs 25,000 or a multiple thereof
To meet the seasonal/temporary gap b/w Govt. Receipt capital &
revenue, and expenditure
TB are issued as discount & repaid on par on maturity
discount serves the purpose of interest
TBs were started in India during 1950s
Ad-Hoc T-Bills were created whenever the GOIs cash bal. with
RBI fell below prescribed level
govts pbm. Solved
.but it led to monetization of budgetary deficit
came in clash with objectives of monetary policy
.discounted after reform processes started in 1990s.

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Features of Central Government Securities.T-Bills
System of Way and Means Advances(WMA) was
introduced in lieu of ad-hoc T bills.
At present, there are only three types of auction T-Bills in
run: 91-day T-Bill, 182-day T-Bill, and 364-day T-Bill.

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Features Central Government Securities.Dated
Securities
Dated Securities carry predominately fixed rate
coupon..although floating rate is also found.
Interest is paid half-yearly
Securities are divided into no. of zero-coupon securities
separately traded at varying yields
process called stripping.
https://www.youtube.com/watch?v=pvTCTl86rrg
Since 1993, Dated securities are auctioned.

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G-Sec Primary Market
Half-
Yearly
RBI Auction
Calendar
GoI/State
Govts.
Cur.
SGL
Primary Dealers A/c

Auction CSGL
CCIL

Gilt Individuals
A/c
/Trusts
Scheduled
Banks
Insurance
Companies NDS-Auction Non-Scheduled
Platform Banks
Pension &
Provident Mutual
Funds Funds
G-Sec Measures of Reforms
Purpose of reforms since 1992-93:
To widen and deepen the primary and secondary segments
of govt. securities market with a view to ensuring a proper
fiscal-monetary coordination.
Elongation of maturities
Consolidation of new issues in key maturities
Enhance of liquidity and fungibility
Promotion of retailing in these securities
Enhancement of transparency in govt.s borrowing
programme
G-Sec Measures of Reforms
Diversifying the Issue
New variants of T-Bills with different maturities, such
as 364-, 91-, and 182-day T-bill, were introduced
Dated securities were diversified in terms of maturity
varying from 2-10 yrs, 25 yrs.
In 2020, 30-yr bonds were issued.
Since July 2020, Floating-rate bonds too are being
issued
Base rate is set equal to average of cut-off yield in the
preceding 03 auctions of 364-day T-bills with annual
resetting.
G-Sec Measures of Reforms
Auction
With the introduction of auctions, the rate of interest
(coupon rate) gets fixed through a market based price
discovery process.
At time of initiation of reform process, IR were
administeredgap b/w real and nominal IRs...
Measures of reforms aimed at avoiding this of
distortionthis is why auction!!!
IR turned reflective of market forces and helped in
better allocation of resourcesturns as an anchor
rate for FIs.
An auction may either be yield based or price
based..RBI goes for yield based
G-Sec MarketTypes of Auctions
Yield Based Auction:
Generally conducted when a new Government security is
issued.
Investors bid in yield terms up to two decimal places (for
example, 8.19 per cent, 8.20 per cent, etc.).
Bids are arranged in ascending order and the cut-off yield is
arrived at the yield corresponding to the notified amount of
the auction.
The cut-off price/yield is taken as the coupon rate for the
security.
Successful bidders are those who have bid at or below the
cut-off price/yield.
Bids which are higher than the cut-off price/yield are rejected.
G-Sec MarketTypes of Auctions
Illustration: Yield based auction of a new security
Maturity Date: September 8, 2018
Coupon: It is determined in the auction (8.22% as shown in
the illustration below)
Auction date: September 5, 2008
Auction settlement date: September 8, 2008*
Notified Amount: Rs.1000 crore

* September 6 and 7 being holidays, settlement is done on September


8, 2008 under T+1 cycle.
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G-Sec MarketTypes of Auctions
An investor may bid in an auction under either of the
following categories:
Competitive Bidding: In a competitive bidding, an investor
bids at a specific yield and is allotted securities if the yield
quoted is within the cut-off yield.
Competitive bids are made by well informed investors such
as banks, financial institutions, primary dealers, mutual
funds, and insurance companies.
The minimum bid amount is Rs.25,000 and in multiples of
Rs.25,000 thereafter.
Multiple bidding is also allowed, i.e., an investor may put in
several bids at various price/ yield levels.
G-Sec MarketTypes of Auctions
Non-Competitive Bidding:
Retail investors, who may lack skill and knowledge to
participate in the auction directly, an opportunity to
participate in the auction process, the scheme of non-
competitive bidding in dated securities was introduced in
January 2002.
Non-competitive bidding is open to individuals, HUFs, RRBs,
co-operative banks, firms, companies, corporate bodies,
institutions, provident funds and trusts.
Under the scheme, eligible investors apply for a certain
amount of securities in an auction without mentioning a
specific yield. Such bidders are allotted securities at the
weighted average yield of the auction.
G-Sec MarketTypes of Auctions
Non-Competitive Bidding.
For a notified amount of Rs.1000 crore, the amount reserved
for non-competitive bidding will be Rs.50 crore (5 per cent of
the notified amount as indicated below).
Non-competitive bidders will be allotted at the weighted
average yield which is Rs.8.20% in the given illustration.
The participants in non-competitive bidding are, however,
required to hold a gilt account with a bank or PD.
Regional Rural Banks and co-operative banks which hold SGL
and Current Account with the RBI can also participate under
the scheme of non-competitive bidding without holding a gilt
account..
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G-Sec Measures of Reforms
Secondary Market Enhancing Marketability & Liquidity
Govt. allowed sale & purchase of securities in retail &
wholesale segments.
Two types of transactions: Outright transactions &
Repo/Reverse Repo Arrangement
Outright Transaction: Started in Jan 2003 for wider access
& participation through anonymous screen-based order
matching trading system..electronic Negotiated Dealing
System (NDS)stated functioning in Aug 2005
Repo Facility.started in Dec 1992..since Oct
2004.Repo/Reverse Repo terms are used interchanged to
conform to International nomenclature.
G-Sec Measures of Reforms
Secondary Market Enhancing Marketability & Liquidity.
Now Repo means purchase of securities by the RBI injecting
liquidity in money market..Reverse Repo means sale of
securities, absorbing liquidity from the market.
Apart from Repo by RBI, inter-bank repo is also found in a
highly regulated way.
Since May 2005, listed companies and non-scheduled urban
coop banks are being allowed to participate in repo.
Measure of Reforms Easing Settlement of
Transaction -DvP
Delivery versus Payment System (DVP)
Through NSDL, SHCIL & NSCCL
DVP is:
Mode of settlement of securities wherein the transfer of
securities and funds happen simultaneously.
Ensures that unless the funds are paid, the securities are
delivered and vice versa.
Eliminates the settlement risk in transactions
Three types of DvP settlements, viz., DvP I, II and III
DvP.
DvP I
securities and funds legs of the transactions are settled
on a gross basis
settlements occur transaction by transaction without
netting the payables and receivables of the participant.
DvP II
securities are settled on gross basis whereas the funds
are settled on a net basis
the funds payable and receivable of all transactions of a
party are netted to arrive at the final payable or
receivable position which is settled.
DvP.
DvP III
both the securities and the funds legs are settled on a net
basis and only the final net position of all transactions
undertaken by a participant is settled.

Note: Liquidity requirement in a gross mode is higher than that


of a net mode since the payables and receivables are set off
against each other in the net mode.
Maintenance of Liquidity in Financial Markets
Liquidity and the Yield
Another aspect of financial sector liquidity is relationship
b/w liquidity and yield on securities.
Greater the liquidity, lower is the yield on govt.
securities.greater the liquidity, lower is the IR and
lower is the yield with a given price of securities
(Malkiel 1962).
Of there are host of factors leading to changes in yield
but assuming them constant for a moment, it is the
varying liquidity that has led the yield to change more
frequently. (See Table next slide)

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Yield of Government Securities

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Financing of Fiscal Deficit.Size of Issue
Not only absolute size of govt. securities grew over years
but also the o/s stock of govt. securities as percentage of
GDP.
March, 1992: 11.8% of GDP
March, 2001 : 21.6% of GDP, and
March, 2006: 28.9% of GDP
An inter-country comparison done by Luengnaruemitchai
and Ong (2005) shows:
Russia: 3.7%, Japan: 145.1% , and India 35.4%
Indias position was higher than 11 countries among 22
countries surveyed.

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Maintenance of Liquidity in Financial Markets
Size of Secondary market transaction
Transactions in the secondary market make an influence
on liquidity in the financial system
Larger the transactions, greater is the influence on
liquidity (McCauley and Remolona 2000)
(Table on next slide shows) amount of transactions in
secondary market from 2004-08, that were large enough
to influence liquidity.
Check outright transactions vs. repo transaction

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Government Securities Transactions in Secondary Market

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Maintenance of Liquidity in Financial Markets
Instability in Liquidity Infusion
Impact of secondary market transactions would be
stabilizing if the amount of transactions varies from one
period to the other only within a narrow range.
But, if it varies widely, it may have de-stablising impact.
RBI, since global financial crisis 2007-08, publishes
Financial Stability Report (half-yearly).

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Liquidity Risk Measurement - RBI
Statutory liquidity ratio (SLR) investments, in general, will
help the banks to withstand sudden liquidity shocks.
The liquidity risk analysis (LRA) captures the impact of
assumed scenarios on banks where
deposit run-offs and
increased demand for the unutilized portion of credit lines
which were sanctioned/committed (taking into account the
undrawn working capital limit and undrawn committed lines
of credit) were considered.

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