RBI committee recommends steps to boost G-Secs market

This is the final report of the working group committee which was set up to find ways of enhancing liquidity in the government bond market. It had submitted a draft report for feedback on 31 May.

A file photo of Reserve Bank of India. Photo: Mint

The 92 dated securities account for a total outstanding of 25.7 trillion. Out of this, 53 securities have outstandings below 20,000 crore each.

“Against the above backdrop, the WG (working group) recommends that active consolidation of government securities may be undertaken to improve liquidity in G-Sec market, reduce cost of borrowing, and contain rollover risk, etc," it said, adding that outstanding dated securities should be brought down to below 50 over the next five years.

However, outright buyback of these securities could be a problem given the widening fiscal deficit as that would push up government expenditure even more. While the government has estimated its fiscal deficit for fiscal 2013 at 5.1% of gross domestic product, various agencies estimate it much higher. For example, Fitch Ratings pegs the fiscal deficit at 5.6% in fiscal 2013.

Consolidation will help both the government as well as bond traders in cash management. However, given the supply glut, this may not be enough to encourage trading in these bonds, said traders. “Consolidation is a welcome step but it is a long-term concern. In this kind of environment, even the existing papers are fast going out of favour. Supply needs to be reined in first," said Devendra Dash, a senior bond trader at Development Credit Bank Ltd.

FIIs should be allowed to invest more in government securities but the limit has to be reviewed on a yearly basis “keeping in view the country’s overall external debt position, current account deficit, size of GoI (government of India) borrowing programme, etc," the committee said.

FII investment in G-secs is capped at $20 billion, of which $10 billion is reserved for investment in securities with residual maturities not less than three years. However, “considering the possible effects of sudden exit of investors on capital flow and on market volatility, the group recommends that the investment limit for FIIs in G-Secs may be increased in gradual steps," the committee said.

To increase trading in a particular government security, the group recommended the allocation of specific securities to each primary dealer, or underwriters of government bond auctions, for market making in them. To encourage retail participation in the bond market, the group recommended that banks and post offices be used as distribution channels and nodal.

anup.r@livemint.com