VI PUBLIC DEBT MANAGEMENT

VI.1 Public debt management by the Reserve Bank
in 2004-05 was guided by the twin objectives of
minimisation of cost over time and lengthening of the
maturity profile of debt for both the Centre and the States
in a scenario of upward shifting yield curves. The market
borrowing programme of the Central and State
Governments was successfully completed in easy
liquidity conditions. The weighted average cost of market
borrowings of the Centre as well as the States increased
marginally after eight years of consecutive decline,
reflecting the hardening of interest rates attributable to
uncertainty surrounding international oil prices, the
upturn in global interest rates, buoyant domestic growth
and sharp spikes in domestic inflation. The weighted
average maturity of the primary issuances of Centre
and States under the market borrowing programme
during the year declined marginally. The Central
Government did not avail of overdraft during 2004-05.
The utilisation of WMA by State Governments was also
lower as compared with the previous year. Issuances
of Floating Rate Bonds (FRBs) continued as part of the
endeavour to provide a diversified pool of instruments
to investors and in a scenario of firming yields, they
facilitated the hedging of interest rate risk. The proposed
re-introduction of the Capital Indexed Bonds (CIBs) in
2005-06 would help to widen the investor base and
provide the holders with an inflation risk free return on
their investment.
VI.2 This section reviews the Reserve Bank’s debt
management operations in response to the
complexities in market processes, technological
requirements for efficient functioning and the ongoing
changes in the macroeconomic environment. The
review highlights the distinct improvement in the
Central Government’s fiscal position, reflected in the
build-up of surplus cash balances with the Reserve
Bank on an enduring basis despite a sharp decline in
gross and net borrowings. The overview of States’ debt
management indicates the emergence of financial
discipline, reflecting the impact of institutional
measures undertaken in the recent past.
CENTRAL GOVERNMENT
Ways and Means Advances
VI.3 The Ways and Means Advances (WMA) limits
of the Central Government remained unchanged at
Rs.10,000 crore for the first half (April-September) of
2004-05 and Rs.6,000 crore for the second half
(October-March). The interest rate on WMA continued
to be at the Bank Rate and on overdraft at two
percentage points above the Bank Rate. A noteworthy
development was that the Central Government did
not resort to overdraft in 2004-05 for the first time
since the operationalisation of WMA Scheme in April
1997 (Table 6.1).

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 7
April – – – 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

152
 PUBLIC DEBT MANAGEMENT

VI.4 The Centre maintained surplus cash balances Chart VI.1: Cash Balances of the Central Government
in its current account with the Reserve Bank during
most part of the year, mainly due to substantial inflows
on account of prepayment of high cost debt by the
States under the debt swap scheme (DSS) and other
receipts. Investment of the Central Government’s
surplus cash balances in dated securities was

Rupees crore
discontinued temporarily from April 8, 2004 in order
to shore up the existing stock of securities for the
conduct of monetary policy. With the introduction of
the Market Stabilisation Scheme (MSS) to absorb
liquidity, investment of surplus balances was partially
restored for investments up to Rs.10,000 crore from
June 12, 2004. This limit was increased to Rs.20,000
crore, effective October 14, 2004. As at end-March
2005, the Central Gover nment’s sur plus cash

20-Sep-04
31-Mar-04
27-Apr-04
22-May-04
15-Jun-04
9-Jul-04
2-Aug-04
26-Aug-04

15-Oct-04
9-Nov-04
6-Dec-04

balances in the form of investment balance (Rs.20,000
crore) and cash balance (Rs.6,202 crore) amounted
to Rs.26,202 crore, almost the same as at end-March
2004 (Rs.26,669 crore) (Chart VI.1). During the fiscal
year, the Central Government took recourse to WMA
on several occasions till September 9, 2004 but
maintained surpluses thereafter.
Treasury Bills
VI.5 The notified amounts of 91-day and 364-day
Treasury Bills (TBs) were increased from Rs.500
crore and Rs.1,000 crore to Rs.2,000 crore each in
2004-05, the increase being entirely on account of
issuances under the MSS with a view to absorbing
sur plus liquidity from the system. Scheduled
issuances of the MSS portion of 91-day and 364-
day TBs during the period from November 10, 2004
to December 1, 2004 and that of 364-day TBs auction
of December 22, 2004 were cancelled on account
of temporary tightness in liquidity conditions. The
weighted average yields of 91-day and 364-day TBs
increased by 26 basis points and 48 basis points,
24-Jan-05
17-Feb-05
14-Mar-05
8-Apr-05
6-May-05
31-May-05
23-Jun-05
18-Jul-05
10-Aug-05
30-Dec-04
respectively, during 2004-05 (Table 6.2 and Appendix
Table I.44).
VI.6 Reflecting movements in inflation rates, the
primary market yields of both 91-day and 364-day TBs
increased 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 and
364-day TBs remained stable up to July 2004 but
increased sharply to reach intra-year peaks of 5.47
per cent and 5.71 per cent in November 2004. The
yields, which were hovering at sub-reverse repo rate
levels during April-July 2004, thus rose above the
reverse repo rate during August 2004. With easing of
headline inflation, the implicit yield declined gradually
thereafter. The yield spread between the 91-day and
364-day TBs widened from six basis points in April

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.

153
 ANNUAL REPORT

Chart VI.2: Primary Yields of Treasury Bills The notified amount of 182-day TBs was fixed at
Rs.1,500 crore, including Rs.1,000 crore under the
MSS. 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.
Per cent

Dated Securities
VI.9 Comfortable liquidity conditions and lower than
budgeted market borrowings facilitated a smooth
completion of the market borrowing programme of the
Central Government. The Central Government raised
a gross amount (excluding issuances under the MSS)
of Rs.1,06,501 crore (a net amount of Rs.46,050
30-Sep-04
31-Mar-04
30-Apr-04
31-May-04

31-Jul-04
31-Aug-04

31-Oct-04
30-Nov-04

28-Feb-05
31-Mar-05
30-Apr-05
31-May-05

31-Jul-05
30-Jun-04

31-Dec-04
31-Jan-05

30-Jun-05

crore) through the issuance of dated securities and

364-day TBs during the year, significantly lower than
Rs.1,47,636 crore (net Rs.88,816 crore) raised during
Date of Auction the previous year (excluding Rs.14,434 crore issued
91-day Treasury Bills 364-day Treasury Bills under the debt buy back scheme). This was on
account of a number of factors. First, the Central
2004 to 39 basis points in March 2005. The bid-cover Gover nment had privately placed secur ities
ratio in the auctions was generally more than two amounting to Rs.16,500 crore with the Reserve Bank
during 2004-05, reflecting favourable liquidity to prepay relatively high cost external debt during
conditions and market appetite for shor t ter m 2003-04; however, no prepayment was effected in
securities (Table 6.3). 2004-05. Second, the higher amount of market
borrowings in 2003-04 resulted in a sharp increase
VI.8 It was decided in consultation with the Central in surplus cash balances to Rs.26,669 crore as at
Government to re-introduce, effective April 6, 2005, end-March 2004 from Rs.8,905 crore as at end-March
fortnightly auctions of 182-day TBs to be conducted 2003; during 2004-05, on the other hand, such cash
on each Wednesday preceding a non-reporting Friday. balances exhibited a marginal decline. Third,
Table 6.3: Treasury Bills – Primary Market @ investments in 14-day Intermediate TBs emerged as
a major source of financing in 2004-05 as compared
Month Average Implicit Bid-Cover Ratio* with 2003-04. Finally, the DSS lowered the Centre’s
Yield at Minimum
Cut-off Price (Per cent)
market borrowing requirement both in 2003-04 and in
2004-05. However, while the impact of the DSS was
91-day 364-day 91-day 364-day
offset by prepayment of external debt and build-up of
1 2 3 4 5 surplus cash balances during 2003-04, there was no
Apr-04 4.38 4.44 2.15 2.47 such offsetting factor in 2004-05, resulting in lower
May-04 4.39 4.33 2.93 2.46 market borrowings.
Jun-04 4.44 4.55 2.61 1.28
Jul-04 4.46 4.60 2.39 2.06 VI.10 During 2004-05, the Central Government
Aug-04 4.76 5.00 1.81 3.36 raised a total amount of Rs.80,350 crore through
Sep-04 4.72 5.14 2.51 2.83
Oct-04 5.15 5.46 1.82 2.75 dated securities; of this, Rs.80,000 crore was raised
Nov-04 5.47 5.71 2.80 2.64 through 19 auctions (comprising 13 reissues and six
Dec-04 5.30 5.69 2.69 2.81 new issues) and Rs.350 crore by way of private
Jan-05 5.31 5.69 2.19 2.06 placement (new issue) (Appendix Tables I.41 and I.43).
Feb-05 5.25 5.65 2.99 2.81
Mar-05 5.24 5.63 2.31 2.74 The Centre had raised Rs.1,00,000 crore through 22
Apr-05 5.17 5.62 4.03 2.54 auctions (6 new issues and 16 reissues) and
May-05 5.19 5.58 3.30 2.29 Rs.21,500 crore through private placement in 2003-04.
June-05 5.29 5.61 1.54 1.81 Two issuances of Floating Rate Bonds (FRBs)
July-05 5.46 5.81 1.21 1.68
devolved partially on the Reserve Bank and Primary
@: As per dates of auction.
Dealers (PDs) amounting to Rs.847 crore and Rs.985
* : Ratio of competitive Bids Received (BR) to Notified Amount (NA).
crore, respectively. This was in contrast to the previous

154
 PUBLIC DEBT MANAGEMENT

year, when there was no devolvement on the Reserve Chart VI.3: Yield and Maturity of
Bank and PDs. During 2004-05, securities amounting Central Government Dated Securities
to Rs.350 crore were privately placed with the
Reserve Bank as against Rs.21,500 crore (including
Rs.16,500 crore on account of prepayment of external
debt) in the previous year. The Reser ve Bank
continued to pursue the policy of elongation of the

Per cent/Years
maturity profile of Government debt while keeping
in view investor response. Of the 20 pr imar y
issuances under the market borrowing programme
during 2004-05, eight securities issued were with
residual maturity of more than 20 years. The seven
new issues included five issues of FRBs.
VI.11 According to the issuance calendar for the
first half (Apr il-September) of 2004-05, dated
securities for face value of Rs.59,000 crore were to
be issued through auctions. As against this, auctions
of dated securities amounting to Rs.54,000 crore Weighted Average Yield (per cent)
were conducted; the auction of Rs.5,000 crore Weighted Average Maturity (years)
scheduled in Apr il 2004 was cancelled. On
September 20, 2004, an indicative calendar for issue
VI.12 The weighted average coupon on the
of dated securities for the second half (October -
outstanding stock of gover nment secur ities
March) of 2004-05 for Rs.44,000 crore was issued;
continued to decline during 2004-05. On the other
of this, Rs.26,000 crore were auctioned, while the
hand, the weighted average matur ity of the
balance scheduled auctions for Rs.18,000 crore
outstanding securities, which had been rising since
were cancelled. The weighted average yield of the
1999-2000, fell marginally to 9.63 years as on March
dated securities issued during 2004-05 worked out
31, 2005 (Table 6.4).
to 6.11 per cent as compared with 5.71 per cent
during the previous year. The weighted average VI.13 Securities over 10-year maturity constituted
maturity of the dated securities issued during 2004- the largest share in the outstanding stock of securities
05 worked out to 14.13 years as compared with 14.94 as well as in new issuances (Table 6.5). Out of the
years during 2003-04 (Chart VI.3). 121 outstanding marketable securities amounting to

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 outstanding
stock 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.

155
 ANNUAL REPORT

Table 6.5: Maturity Profile of Table 6.7: Repayment Schedule of Centre's

Central Government Securities Outstanding Market Loans
(Per cent)
(As on March 31, 2005)
Outstanding Stock Issued during the Year
Year Rs. crore
Year Under 5 5-10 Over 10 Under 5 5-10 Over 10
(End-March) Years Years Years Years Years Years 1 2

1 2 3 4 5 6 7 2005-06 55,631 *
2006-07 44,079 **
1997-98 41 41 18 18 82 0 2007-08 45,876
1998-99 41 42 16 18 68 14 2008-09 44,028
1999-00 37 39 24 0 35 65 2009-10 52,589
2000-01 27 47 26 6 41 53 2010-11 56,586
2001-02 31 36 33 2 24 74 2011-12 55,581
2002-03 26 35 39 0 36 64 2012-13 57,074
2003-04 24 32 44 5 15 80 2013-14 59,009
2004-05 27 30 43 11 11 78 2014-15 42,018
2015-16 65,244
Rs.8,95,348 crore as at end-March 2005, 44 2016-17 48,130
securities with minimum outstanding amount of 2017-18 50,774
2018-19 37,478
Rs.10,000 crore or more accounted for 67 per cent of
2019-20 28,000
the total outstanding amount as compared with 63 2020-21 11,000
per cent at end-March 2004. 29 securities with 2021-22 13,213
outstanding amount between Rs,5,000-Rs.10,000 2022-23 32,000
crore accounted for 22 per cent of the total 2023-24 21,000
outstanding amount at end-March 2005. 2025-26 16,688
2026-27 15,000
VI.14 The stock of Central Government securities 2027-28 15,000
held by the Reserve Bank fell by Rs.7,071 crore 2028-29 11,000
during 2004-05 (Table 6.6). 2032-33 14,000
2034-35 4,350
VI.15 The repayment schedule of outstanding Total 8,95,348
market loans of the Central Government as on March * : Including repayment of Rs.20,000 crore under the MSS.
31, 2005 indicates bunching of repayments between ** : Including repayment of Rs.5,000 crore under the MSS.
2009-10 and 2015-16 (Table 6.7).
VI.16 The share of securities with coupon at 10 per
Table 6.6: Reserve Bank's Stock of Central cent and above continued to fall in keeping with the
Government Securities declining trend of the last five years (Table 6.8).
(Rupees crore)

Year Outstanding Special Securities Total Table 6.8: Interest Rate Profile of
(End-March) Dated Issued in Out- Outstanding Central Government Securities
Securities* Conversion of standing* (As on March 31, 2005)
Ad-hoc
Treasury Bills Interest Rate Outstanding Amount Share in
(Per cent) (Rupees crore) (Per cent)
1 2 3 4
1 2 3
1996-97 6,666 1,21,818 1,28,484
4.00-4.99 42,500 4.75
1997-98 31,977 1,01,818 1,33,795 5.00-5.99 96,818 10.81
1998-99 42,212 1,01,818 1,44,030 6.00-6.99 1,51,772 16.95
1999-00 35,190 1,01,818 1,37,008 7.00-7.99 1,34,540 15.03
2000-01 41,732 1,01,818 1,43,550 8.00-8.99 37,638 4.20
2001-02 40,927 1,01,818 1,42,745 9.00.-9.99 56,424 6.30
2002-03 55,438 61,818 1,17,256 10.00-10.99 83,537 9.33
2003-04 77,397 0 77,397 11.00-11.99 1,65,646 18.50
12.00-12.99 94,249 10.53
2004-05 80,770 0 80,770
13.00-14.00 32,222 3.60
* Inclusive of securities sold under the LAF. Total 8,95,348 100.0

156
 PUBLIC DEBT MANAGEMENT

VI.17 For 2005-06, the Union Budget has placed
net market borrowings (excluding MSS) of the
Central Government at Rs.1,10,295 crore (inclusive
of net issuances of 182-day TBs). Including
repayments of Rs.68,272 crore (Rs.35,631 crore of
dated securities, Rs.26,141 crore of 364-day TBs and
Rs.6,500 crore of 182-day TBs), the gross market
borrowing is estimated at Rs.1,78,467 crore
(Rs.1,39,467 crore through dated securities and
Rs.26,000 crore through 364-day TBs and 13,000
crore through 182-day TBs). Thus, the budgeted
gross borrowings are significantly higher than the
actual amount raised in 2004-05. An indicative
issuance calendar for issue of dated securities for
the first half of the year 2005-06 was issued in
consultation with the Government for an aggregate
amount of Rs.83,000 crore (Table 6.9). As in the past,
the Reser ve Bank will have flexibility to var y
issuances of Government securities keeping in view
the emerging requirements of the Government.
During 2005-06 so far (up to August 19, 2005), gross
market borrowing (excluding issuances under the
MSS) raised by the Central Government through
dated secur ities, 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.18,224
crore) during the corresponding period of the
previous year. All issuances were by way of fixed
coupon securities as against a share of 59 per cent
during the corresponding period of the previous year,
reflecting the favourable market appetite for such
securities. There has been no devolvement/private
placement during the year so far. To facilitate
consolidation and impart liquidity to the Government
securities market, all the securities were reissuances
of securities issued earlier.
VI.18 Instrument diversification has been a key
component of the Reserve Bank’s initiatives for the
development 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 CIB
mainly due to lack of response of market participants
for the instrument. Taking into account the past
exper ience as well as inter nationally popular
structure of CIBs, a modified structure of CIB is
proposed 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

157
 ANNUAL REPORT
Box VI.1
Capital Indexed Bonds
Capital Indexed Bonds (CIBs) minimise the inflation risk to
the 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 to
inflation risk. From the issuer’s perspective, the CIB helps
in reducing cost of borrowing as it eliminates the ‘inflation
risk’ 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 the
rate 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 a
CIB are: (i) the selection of an inflation index and (ii) the
indexation process in the design to deal with indexation
lag. 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 publication
lag 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 settlement
of bonds between coupon payment dates. For a bond
offering semi-annual coupon payments, the indexation lag
on account of institutional factor would be six months. As
the length of indexation lag has direct relationship with
VI.19 The Internal Technical Group on Central
Government Securities Market had recommended,
inter alia, introduction of ‘When Issued Market’ and
Box VI.2
When Issued Market
“When, as and if issued” [also known as “when-issued”
(WI)] mar kets in Gover nment secur ities 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
158
real value certainty or level of inflation protection, it is
always desirable to minimise indexation lag.
Internationally, there are two broad designs of indexed bonds
- the UK model and the Canadian model. While the UK model
takes 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 applicable
to 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 any
particular 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), “Treasury
Inflation-Indexed Debt: A Review of the U.S
Experience”, Federal Reserve Bank of New York
Economic Policy Review, May: 47-63.
2. Wilcox, David W. (1998), ‘Policy Watch: The
Introduction of Indexed Government Debt in the
United States’, Journal of Economic Perspectives
12,No.1 (Winter): 219-27.
limited short selling in Government securities. These
recommendations would be considered in
consultation with the Central Government (Box VI.2).
to 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 outstanding
positions in the WI market as the issue date approaches.
There is, however, the risk of participants overestimating
their ability to cover short positions prior to settlement.
 PUBLIC DEBT MANAGEMENT

II. STATE GOVERNMENTS in investments in 14-day Intermediate Treasury Bills

(Table 6.10).
Ways and Means Advances
VI.21 State Gover nments, excepting Kerala,
VI.20 During 2004-05, the average utilisation of Arunachal Pradesh, Mizoram, Nagaland, Tripura and
special WMA, normal WMA and overdrafts by the Uttaranchal resorted to WMA for a fewer number of
State Governments was lower than the previous year days as compared with 2003-04 (Table 6.11). The
(Chart VI.4). The improvement in the overall cash recourse to overdrafts by the State Governments
position of the States was also reflected in the spurt also showed improvement over the previous year.
As many as 13 States did not avail overdrafts in
Chart VI.4: Outstanding WMA and Overdrafts to States 2004-05.
VI.22 Effective April 1, 2005 the aggregate normal
WMA of the State Governments, which is based on
the recommendations of the Ramachandran
Committee, was revised upwards by 9.8 per cent.
The increase is due to the higher average revenue
receipts of the States in the preceding three years.
Rupees crore

The WMA limit for non-special category States was

revised upwards by 9.4 per cent for the year 2005-06.
In the case of special category States, there was an
increase of 13.5 per cent (Table 6.12). The Advisory
Committee on Ways and Means Advances to the
State Governments (Ramachandran Committee;
January 2003) had recommended that the formula
and the limits of WMA to State Governments may
be reviewed in totality after receipt of the
April

May

July

October

November

December

March
June

August

September

January

February

recommendations of the Twelfth Finance

Commission (TFC). Accordingly, an Advisor y
Committee on Ways and Means Advances to the
State 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-day

Intermediate
Treasury 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 4,987
June 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.

159
 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 of
days 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 28 196
8. 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.24 Of the total borrowings by States during

VI.23 The net market borrowings allocated to the
States for 2004-05 amounted to Rs.36,935 crore,
including additional allocation of Rs.18,805 crore
under the DSS. Taking into account repayments of
Rs.5,123 crore, the gross allocation amounted to
Rs.42,058 crore in 2004-05. As against this, gross
market borrowings during 2004-05 by the State
Governments were lower at Rs.39,101 crore. An
amount of Rs.16,943 crore was raised under the DSS
during 2004-05. The gross borrowing also included
an additional amount of Rs.1,387 crore for
prepayment of loans from the NABARD under the
RIDF Scheme (Table 6.13).
2004-05, 98 per cent was through sale of securities
on a tap basis (Table 6.14).
VI.25 Borrowings raised by way of auctions
aggregated Rs.885 crore accounting for two per cent
of total borrowings (Table 6.15).
VI.26 The weighted average yield of State
Government securities increased during 2004-05
while the weighted average maturity declined to
10.01 years in 2004-05 from 11.01 years in 2003-04.
While the cut-off yield in the auctions ranged
between 7.10-7.25 per cent, the coupon of the tap
issuances ranged between 5.60 and 7.36 per cent

160
 PUBLIC DEBT MANAGEMENT

Table 6.12: Normal WMA Limits of States

(Rupees crore)

State WMA Limits WMA Limits WMA Limits WMA Limits WMA Limits WMA Limits
1999 (effective 2001 (effective 2002 (effective 2003 (effective 2004 (effective 2005 (effective
March 1, 1999)$ February 1, 2001) April 1, 2002) March 3, 2003)* April 1, 2004) April 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 States

1. 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).

(Table 6.16). The investor response to market
borrowings by some States was rather lukewarm in
2004-05, reflecting both demand and supply side
factors. The response to tap issues held in the year
2004-05 was not encouraging (the tap issues closed
with shortfalls except on two occasions), though
there was surfeit of liquidity in the system. The spread
in the cut-off yields in the auctions also widened. In
this context, the need for improving the secondary
market liquidity in State Government securities has
received increasing attention.
VI.27 At end-March 2005, 60 per cent of the total
outstanding debt of State Governments was in the
maturity bucket of 6-10 years as compared with 54
per cent as at end-March 2004 (Table 6.17).
VI.28 The maturity profile of outstanding State
Government Securities and Power Bonds issued by

161
 ANNUAL REPORT

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

(Rupees crore)

State Gross Repayment Net Gross Gross Gross

Allocation 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 2,020
8. 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

State Governments suggests that the repayment
burden for State Governments would be very high
during the period 2012-13 to 2014-15, reflecting high
amount of borrowings during 2002-03 to 2004-05
under the DSS (Table 6.18).
VI.29 The interest rate profile of the outstanding
stock of the State Government securities shows that
63 per cent of borrowings was contracted at interest
rates ranging from 5.00 per cent to 9.99 per cent. The
share of total outstanding stock with interest rate
above 10 per cent declined to 37 per cent from 47
per cent in the previous year (Table 6.19).
Working Group to Frame the Model Fiscal
Responsibility Legislation at State Level
VI.30 In the twelfth Conference of State Finance
Secretaries held on August 1, 2003, it was decided
that the Reserve Bank would provide technical
assistance in the preparation of a model fiscal
responsibility legislation for the State Governments.

162
 PUBLIC DEBT MANAGEMENT

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 0
10. 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 0
23. 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.

Accordingly, a Group was constituted in October Gover nment of India, Ministr y of Finance, as
2003 with select Finance Secretaries of State members. The Report of the Group was submitted
Gover nments and a representative of the on Januar y 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 Spread
No. 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.

163
 ANNUAL REPORT

Table 6.16: Weighted Average Yield of State Table 6.18: Maturity Profile of Outstanding
Government Securities State Government Securities and Power Bonds
(per cent per annum) (At end-March 2005)
Year Range Weighted Average (Rupees crore)
1 2 3 Year State Loans Power Bonds Total
Outstanding
1995-96 14.00 14.00
1996-97 13.75-13.85 13.83 1 2 3 4
1997-98 12.30-13.05 12.82
2005-06 6,274 0 6,274
1998-99 12.15-12.50 12.35
2006-07 6,551 1,494 8,045
1999-00 11.00-12.25 11.89
2007-08 11,555 2,989 14,544
2000-01 10.50-12.00 10.99
2008-09 14,400 2,989 17,389
2001-02 7.80-10.53 9.20
2009-10 16,511 2,989 19,500
2002-03 6.60-8.00 7.49
2003-04 5.78-6.40 6.13 2010-11 15,870 2,989 18,859
2004-05 5.60-7.36 6.44 2011-12 22,032 2,989 25,021
2005-06 (up to Aug. 12, 05) 7.32-7.77 7.66 2012-13 30,628 2,989 33,617
2013-14 32,078 2,989 35,067
Conference of State Finance Secretaries held on 2014-15 33,385 2,989 36,373
2015-16 13,462 2,989 16,451
August 13, 2004 the Report of the Group has been
2016-17 10,697 1,494 12,191
placed on the Reserve Bank’s website.
Total 2,13,443 29,886 2,43,329

Table 6.17: Maturity Profile of Outstanding State

Conference of State Finance Secretaries
Government Securities (At end-March 2005)
Percentage to total amount outstanding Total
VI.31 During 2004-05, the 14th and 15th conferences
Amount were held on August 13, 2004 and January 24, 2005
State 0-5 6-10 Above 10
years years years
Outstanding respectively. In the 14th Conference, issues relating
(Rs. crore) to market and other borrowings of State Governments,
1 2 3 4 5 policy for identifying durable surplus for investment,
improving secondar y market liquidity of State
1. Andhra Pradesh 29.7 64.9 5.4 19,964
Government Securities and draft Repor t of the
2. Arunachal Pradesh 15.0 48.1 36.9 279
Working Group on the Model Fiscal Responsibility
3. Assam 30.7 59.1 10.3 5,129
4. Bihar 32.2 55.4 12.3 11,803
Legislation at State Level were discussed. It was also
5. Chhattisgarh – 72.1 27.9 1,744 decided in the Conference to form two Working
6. Goa 27.1 59.2 13.6 961 Groups with representatives from select State
7. Gujarat 22.4 65.3 12.3 12,657 Governments for (i) improving secondary market
8. Himachal Pradesh 15.2 72.8 12.0 3,690 liquidity of State Development Loans and (ii) devising
9. Harayana 26.3 62.1 11.6 4,755 a methodology of compilation of data on various types
10. Jammu & Kashmir 21.4 66.5 12.1 2,693 of debt liabilities of the States.
11. Jharkhand – 86.9 13.1 1,971
12. Karnataka 23.8 62.8 13.4 11,762 Table 6.19: Interest Rate Profile of
13. Kerala 33.0 56.1 11.0 9597 Outstanding State Government Securities
14. Maharashtra 21.3 57.8 20.9 17,544 (At end-March 2005)
15. Madhya Pradesh 32.3 54.4 13.3 10,341
16. Manipur 27.8 47.3 24.9 598 Range of Interest Rate Outstanding Amount Percentage to
17. Meghalya 33.3 46.7 20.0 825 (per cent) (Rupees crore) Total
18. Mizoram 24.9 51.7 23.3 501 1 2 3
19. Nagaland 32.5 54.9 12.6 1,237 1. 5.00-5.99 34,612 16.22
20. Orissa 34.0 50.0 16.1 9,581 2. 6.00-6.99 58,563 27.44
21. Punjab 23.4 62.0 14.6 7,718 3. 7.00-7.99 27,872 13.06
22. Rajasthan 29.0 60.7 10.3 14,358 4. 8.00-8.99 8,004 3.75
23. Sikkim 50.0 28.9 21.1 332 5. 9.00-9.99 5,412 2.54
24. Tripura 26.8 44.1 29.1 1,025 6. 10.00-10.99 14,563 6.82
25. Tamil Nadu 26.8 64.3 8.9 13,786 7. 11.00-11.99 17,062 7.99
26. Uttaranchal – 78.6 21.4 2,812 8. 12.00-12.99 25,362 11.88
27. Uttar Pradesh 34.9 52.7 12.4 27,051 9. 13.00-13.99 15,720 7.37
28. West Bengal 21.5 58.7 19.8 18,728 10. 14.00 6,274 2.94
Total 27.0 59.6 13.4 2,13,443 Total 2,13,443 100

164
 PUBLIC DEBT MANAGEMENT
VI.32 In the 15 th Conference held on January 24,
2005 the deliberations focused on issues such as
market borrowings of State Gover nments,
presentation on the Wor king Group on State
Government Liabilities and review of the working of
the State Finance Secretaries’ Conferences. An
interface with the Indian Banks’ Association was also
organised to deliberate upon the issues relating to
default and restructuring/unilateral alteration in the
financial terms of SLR State Government guaranteed
bonds issued by State Government entities.
VI.33 The 16 th Conference of State Finance
Secretaries was organised on April 8, 2005 to deliberate
exclusively on the recommendations of the Twelfth
Finance Commission (TFC) and operational issues
emanating therefrom. Dr. C. Rangarajan, Chairman, TFC
and Chairman, Economic Advisory Council to the Prime
Minister, delivered the inaugural address.
Technical Advisory Committee
VI.34 Dur ing 2004-05, three meetings of the
Technical Advisory Committee (TAC) on Money,
Foreign Exchange and Gover nment Securities
Markets were held. In the meeting held on May 31,
2004 issues such as liquidity aspects of State
Government securities, eligibility of corporates in the
repo market, permission to banks to trade in exchange
traded derivatives and operational issues of Delivery
versus Payment (DvP) III were discussed. In the
meeting held on September 17, 2004, the future
course of action on OTC derivatives, permission to
banks to trade in exchange traded derivatives and
issues for further development in the commercial
paper market were discussed. It was also decided to
constitute two Sub-Groups. The Group under the
chairmanship of Shri D. N. Ghosh was set up to
recommend the steps to be taken in order to allow
banks to trade in Interest Rate Futures (IRFs) and to
harmonise regulatory norms between Over the
Counter (OTC)/exchange traded derivatives and also
between r upee denominated/cross currency
165
derivatives involving rupee in one leg. A Working
Group on Liquidity of State Government Securities
was set up to examine the modalities of improving
the secondary market liquidity of State Development
Loans. In the 21st meeting of the TAC held on January
18, 2005 recommendations of the Sub-Group on
Primar y Dealers System in India - Issues and
Prospects were discussed. A review of benchmark in
regard to prudential limits in call/ notice money market
and of the system of liquidity support to gilt mutual
funds was also undertaken. In the 22nd meeting of
the TAC held on April 12, 2005 draft reports of the
Technical Groups on Money Mar ket, Central
Government Securities Market, and Forex Markets
were discussed. These reports have been placed on
the Bank’s website.
Outlook
VI.35 The market borrowing programme of the
Central Government during 2005-06 is budgeted to
be much higher than in the previous year.
Furthermore, the interest rate cycle is turning up
internationally. The Reserve Bank expects to conduct
debt management within the monetary projections set
out in the Annual Policy Statement for 2005-06
consistent with the objectives of minimisation of cost
and rollover risk. The reintroduction of capital indexed
bonds is expected to widen the choice for investors
while lowering the cost of borrowings to the
Government in the long run. The initiatives by the
Reser ve Bank towards fur ther deepening and
widening the Government securities market with
innovative instruments and new participants would
pave the way for healthy and smooth conduct of debt
management and borrowing requirements. The steps
taken towards improving the liquidity of State
Government loans are expected to ease hurdles
encountered by State Governments in their access
to the market. State Governments’ efforts towards
ensuring sustainability of debt position will be an
abiding concern of the Reserve Bank in the conduct
of public debt management operations in 2005-06.