The Reserve Bank of India (RBI) on Thursday issued the medium-term debt management strategy (MTDS) for a period of three years till 2017-18.
As part of this strategy, the central bank has said that issuance of short-term debt has been significantly moderated keeping in view the need for an appropriate debt portfolio.
“As a result, no market borrowing has been proposed in the 0-5 year time bucket. Market borrowing in the 5-9 years bucket has been proposed to reduce from 19.4% to total in 2014-15 to 15.5% in 2017-18,” it said.
“Analysing the cost-risk trade-off of this strategy, though this may increase cost due to issuance in longer tenors, there is substantial risk reduction due to elongation of maturity,” RBI said adding that the cost of the strategy is expected to be very low or marginal in view of current yield curve.
The central bank has also indicated that in order to alleviate the redemption pressures in less than 10 years’ maturity buckets in future and further moderate rollover risk, the share of securities having a residual maturity of less than 10 years would be brought down to 55% by fiscal year 2020-21 from present level of 58.59% as at end-March March 2015.
This can be achieved by appropriate issuance strategy and undertaking switches/buybacks from less than 10 years maturity, RBI said. Switches of Rs 30,000 crore are expected to be conducted in 2015-16 and Rs 50,000 crore each in 2016-17 and 2017-18.
Issuance of longer tenure bonds beyond 30 years will also be undertaken to match demand from insurance companies and provident funds, the central bank has indicated. Citing the example of the 40-year bonds issued in October which saw a good response, RBI said switching over to longer-tenure bonds will help in mitigating risks.
Strategy for market borrowing in the 15-19 years bucket has been increased from 16.6% in 2014-15 to 18% in 2017-18. Borrowing in the 20 years and above segment is assumed to increase from 18.8% in 2014-15 to 20% in 2017-18.
“With an objective to smoothen redemptions, switching of short-tenor bonds maturing at proximate years with long-tenor bonds will be undertaken and is expected to reduce rollover risks,” RBI said adding that a switch calendar would be announced with a focus on effective liability management in order to take the process forward.
The share of short-term debt is set at a benchmark of 10% of total debt and a leeway of plus/minus 3% has been maintained. In line with the strategy of elongating maturity, the proposed benchmark for average maturity of the debt portfolio has been kept at 10% with a leeway of plus/minus 2%.
MTDS would also look towards a calibrated approach in improving foreign currency debt. RBI also said that issuance of floating rate instruments will be taken up depending on the market conditions and emergent demand considering that these instruments would improve the breadth and width of the G-Sec market and enable market participants to diversify their portfolio.
Improving the liquidity of the G-secs market is also being considered as an important step.
The RBI said that it would be desirable to further improve the liquidity in G-Sec market and also broad-base the same in order to minimise the interest rate risk emanating from illiquidity premium for government debt.