Investors request RBI to let state govt debt be sold as zero-coupon bonds: Report
Insurers led the demand for the Separate Trading of Registered Interest and Principal of Securities (STRIPS) facility in state bonds, with bond investors submitting a formal, written request at a meeting to discuss market issues with the RBI
Investors have requested the Reserve Bank of India to allow state government debt to be turned into zero-coupon bonds, according to people familiar with the matter.
Insurers led the demand for the Separate Trading of Registered Interest and Principal of Securities (STRIPS) facility in state bonds, with bond investors submitting a formal, written request at a meeting to discuss market issues with the central bank, the people said, asking not be identified discussing private matters.
At present, the RBI provides this feature only for federal debt. Strips, a popular product in US and other developed markets, were first issued in India in 2010 with little success, but volumes have surged in recent years amid greater demand for long-term savings products as the nation grows wealthier.
Allowing state notes to be turned into so-called strip bonds would give investors an extra spread of 30-to-40 basis points over comparable federal securities, one of the people said. State bonds, which are less liquid, are typically sold at higher yields than their central government counterparts.
In the STRIPS process, bonds are broken into future principal and coupon payments, and then sold as individual securities at a discount to their final value. The principal notes tend to be favored by pension funds and insurers who want longer-duration instruments to match assets and liabilities.
Insurers have stepped up their investments in sovereign debt since the pandemic, with their holdings climbing to 26 per cent of outstanding bonds in June 2024, from 24 per cent in December 2019, according to latest RBI data.
The face value of strips stood at 1.4 trillion rupees ($16.5 billion) as of Sept. 30, compared to 2.5 trillion rupees for all of 2023, data from the Clearing Corp. of India show. The value of trades has more than tripled since 2020-21.
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Business NewsIndustryBankingInvestors request RBI to let state govt debt be sold as zero-coupon bonds: Report
First Published:10 Dec 2024, 08:59 PM IST
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