PUBLIC DEBT INDIAN CONTEXT

Government Debt (also known as Public Debt, National Debt) is money (or credit ) owed by a central government. Government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders).

Reserve Bank of India administers and manages the Public Debt Operations of the country and conducts the issue and servicing of new loans of the Central and State Governments, primarily Dated Securities, through its Public Debt Offices (PDO). To accomplish the task of administration and management of internal debt, RBI had a decentralized system of operations through 15 Public Debt Offices established at 14 centres. With the computerization of Public Debt Office-cumNegotiated Dealing System (PDO-NDS), the PDO system now operates as an integrated virtual centralized system.

Public Debt Management Process of formulating and executing a strategy for managing the governments debt to raise the required amount of funding, within the ambit of cost/risk objectives. Public Debt Management also encompasses other functions such as cash and liquidity management of Central and State governments as also the development of a liquid and deep market for government securities which will facilitate the cost reductions of public debt.

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 in Government Securities.

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) of RBI. Section 21A RBI Act 1934 A State entrusts its banking business to RBI by voluntarily entering into an agreement. 23 States enter into such agreements with RBI to undertake general banking business in India, including payments, receipts, collection, remittance of money, management of public 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) of RBI Act, 1934 - RBI provides Ways and Means Advances (WMA) to the States banking with it to help them to tide over temporary mismatches in the cash flow of their receipts and payments. Such advances, are repayable in each case within 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 limit sanctioned. RBI determines limits for normal and special WMA for each State. Limits revised periodically.

Any amount drawn by a State in excess of WMA is an overdraft. No State allowed to run an overdraft with RBI for more than 10 continuous 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 monitored in 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 of 75% of the aggregate limit (aggregate = normal plus operative limit for special WMA), the State is cautioned to take remedial measures to avoid overdraft in its account.

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. .

RBI & Government's Banking Transactions Section 20 of the RBI 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. Section 21 - RBI also has the right to transact Government business of the Union of India. Section 21A - State Government transactions carried out by RBI in terms of the agreement entered into with the respective State Governments.

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Reserve Bank of India - Banker to Government RBI maintains the Principal Accounts of Central as well as State Governments 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 of RBI and branches of Agency Banks appointed under Section 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., HDFC Bank Ltd. and Axis Bank Ltd. act as 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). Central Government issues both, T-bills and bonds or dated securities. State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs are called risk-free gilt-edged instruments. Government of India also issues savings instruments (Savings Bonds, NSCs, etc.) or special securities (Oil bonds, FCI Bonds, Fertiliser Bonds, Power Bonds, etc.). These are not fully tradable and are not eligible to be SLR securities.
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T-Bills - Money market short term debt instruments issued by GOI in three tenors, viz. 91 day, 182 day and 364 days. T-Bills - Zero Coupon Securities and pay no interest. Issued at a 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 of T-bill issuances for a financial year in the last week of March of the previous financial year. RBI announces the issue details of T-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), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and 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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Dated Government Securities (G-Secs) Dated G-Secs are long term securities and carry a fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years. The Public Debt Office (PDO) of RBI 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 Fixed Rate 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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Bonds with 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 as notified in the Official Gazette.

Forms of G-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, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies. STRIPS - Separate Trading of Registered Interest and Principal of 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 are dated securities issued through an auction similar to the auctions conducted for dated securities issued by GOI. Interest at half-yearly intervals and the principal repaid on the maturity date. SDLs issued by the State Governments qualify for SLR. 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 mutual fund schemes floated by asset management companies with exclusive investments in government securities. The Government Securities Act, 2006 - Act to consolidate and amend the laws relating to G-Secs and its management by RBI and for relative matters. Government Securities Regulations, 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 government securities 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 to gilt 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 of RBI wherever desired by the gilt funds.

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3. Funds Transfer Facility: 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 of cheques arising out of government securities transactions, tendered at the RBI counters. 4. Access to 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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Advantages of Investment In G-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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Advantages of Investment in G-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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