Policy Measures undertaken in the 1990s

The auction system for the sale of medium and long tem securities was introduced from June 3, 1992. Some innovative instruments such as conversion of auction (Treasury bills) T- bills into term securities, zero coupon bonds, capital indexed bonds, tap stock and partly paid stock were introduced.

From April 28, 1992, 364-day T-bill auctions were introduced and 91 day T-bill auction from January 8, 1993.

Auctions of repurchase agreements (Repo) of dated government securities were introduced from December 1992.

To develop the market, Securities Trading Corporation of India (STCI) was set up in May 1994. It began its operations in June 1994.

The most notable policy development in the government securities market during 1994-95 was the de-linking of the budget deficit from automatic monetization by initially limiting the creation of ad hoc T-bills and subsequently discontinuing them.

The National Stock Exchange started trading in government securities from June 30, 1994.

As a move towards greater transparency, the transactions of government securities through SGL accounts have been made public by the Reserve Bank on a regular basis from September 1, 1994.

A delivery versus payment (DVP) system for transactions in government securities was introduced with effect from July 17, 1995. The DVP system synchronizes the transfer of securities with cash payment thereby reducing the settlement risk in securities transactions and also preventing the diversion of funds in case of transaction routed through the SGL accounts. In 1999, the computer networking between Reserve Bank’s SGL and NSDL was completed, thus enabling electronic settlement for investors having depository accounts with NSDL.

The Reserve Bank set up a strong regulatory system which required that every trade must settle with funds and delivery of securities. IOUs and netting were prohibited. Trade reporting of the negotiated deals was made compulsory at the WDM segment of NSE.

In May 1995, the governments, for the first time, issued guidelines for non-government provident funds, superannuation funds, and gratuity funds to earmark 25 percent of their total corpus for investment in central government securities.

A well behaved government securities market enabled other segments of the debt market to develop. As a step towards this, the government went for diversification of instruments introduction of floating rate bonds indexed yield on 364-day T-bills. Moreover, it reissued securities of two year, three year, five year, and ten year maturities at fixed coupon. Further, it permitted commercial banks to retail government securities with non-bank clients.

A scheme of ways and means advances (WMA) was introduced effectively from April 1, 1997 to accommodate temporary mismatches between government receipts and payments. This scheme replaced the practice of automobile monetization of deficit.

For building up a viable institutional framework and to diversify investor base, the Reserve Bank appointed primary dealers (PD) and satellite dealers to perform the role of market makers in government securities.

Foreign Institutional investors with a ceiling of 30 per cent investment in debt instruments have been permitted to invest in government dated securities. In order to facilitate custodial and depository services to FIIs in government dated securities and T-bills. FII investments are now permitted through the SGL account of depositories, in addition to the SGL account of the designated Banks, subject to certain conditions.

A flexible approach to the market borrowing program of the state governments was introduced whereby they were given the option to raise 5 to 35 percent of their market borrowings in a manner as regards timings maturity and rate of interest.

With a view to moderating the adverse impact of a large borrowing program, the Reserve Bank accepts private placement of government stock and releases them to the market when interest rate expectation become favorable. After a gap of nearly seven years, the government issued a long term paper with a maturity of 20 years in 1998-99.

To encourage retail participation in the primary market for government securities an allocation of up to 5 percent gas been provided to retail investors on a non-competitive basis. The uniform price auction format for auctions which was confined to the auction of 91 day treasury bills was extended the auction of dated securities.