The Reserve Bank of India (RBI) is working with the government to enable international settlement of transactions in government securities (g-secs), RBI governor Shaktikanta Das said on Tuesday.
The move will enable non-resident Indians to invest in g-secs, the RBI governor said, speaking at the 21st annual conference of the Fixed Income Money Market and Derivatives Association of India and Primary Dealers’ Association of India.
“Expansion of the investor piece is key to further development of the market. RBI, together with the government, is making efforts to enable international settlement of transactions in g-secs through international central securities depositories, that is, ICSDs,” Das said.
Once operationalised, this will enhance access of non-residents to the g-sec market as will the inclusion of Indian g-secs in the global bond indices, for which efforts are ongoing, he added.
The governor said as part of the road map for the gradual restoration of the variable rate reverse repo (VRRR) auction as the main operation under the revised liquidity management framework, RBI will conduct “fine-tuning operations” from time to time as needed. This will be aimed at facilitating the process of markets settling down to regular timings and functioning and the normalisation of liquidity operations. The process will help manage unanticipated and one-off liquidity flows so that liquid conditions in the system evolve in a balanced and evenly distributed manner, Das said.
He emphasised the need to develop a yield curve that is liquid across tenors, observing that secondary market liquidity, as measured by turnover ratio, is found to be relatively low on several occasions. It also tends to remain concentrated in a few securities and tenors. “The yield curve accordingly displays kinks, reflecting liquidity premium commanded by select securities or tenors. To a certain extent, this is a result of the market microstructure in India, dominated as it is by the buy-and-hold and long-only investors,” Das said.
The governor said liquidity in the g-sec markets tends to dry up during periods of rising interest rates or in times of uncertainty. While the market for special repo facilitates borrowing of securities, it is worthwhile to consider other alternatives that ensure adequate supply of securities to the market across the spectrum of maturities, Das said.
He referred to past discussions on the introduction of securities lending and borrowing mechanism (SLBM). They were held with a view to augment secondary market liquidity by incentivising buy-and-hold-type investors such as insurance companies and pension funds to make available their securities to other market participants. Das urged for a continuation of discussions on the matter as part of overall market development.
Das said this is an opportune time to consider new instruments to facilitate hedging of long-term interest rate and reinvestment risk by market participants such as insurance companies, provident and pension funds and corporates. “The interest rate derivatives (IRD) market has developed over the years with the availability of a wide range of products. The only major liquid product, however, continues to be the Mumbai Interbank Offer Rate (MIBOR) based Overnight Indexed Swaps (OIS) market,” Das said, adding, “Participation in the IRD markets is also largely limited to foreign banks, private sector banks and primary dealers.”
In this regard, he appreciated FIMMDA’s formulation of operational guidelines for trade in swaptions, which has now commenced. “On its part, the Reserve Bank will endeavour to ensure adequate liquidity in the g-sec market as an integral element of its effort to maintain comfortable liquidity conditions in the system,” Das said.