Average Maturity Of Public Debt Up At 14.3 Yrs

Mumbai, Aug 30: | Updated: Aug 31 2002, 05:30am hrs
The weighted average maturity of government debt has been elongated to 14.3 years in 2001-02 from 5.5 years in 1996-97.

As a result, the weighted average maturity of outstanding debt rose to 8.2 years on March 31, 2002 from a low of 6.3 years on March 31, 1999 after a peak of 16 years in 1991.

The enablers of maturity elongation in market related environment of interest rates were benign inflationary environment and development of securities market over the year.

The Reserve Bank of India (RBI) had twin objectives of elongating the maturity profile and minimising costs which, are contradictory in nature as the cost increases with longer maturity. The softening interest rate scenario in the past couple of years has helped the central bank achieve its twin objectives.

Floating Rate Bonds (FRB) have become a tool to reduce the interest rate risk for banks. Since banks are mandated to hold government securities, they have little control on the interest-rate risk of their portfolio and impact on balance-sheet.

The increase in maturity of new debt leads to an increase in the interest-rate risk.

The RBI is pursuing the creation of the Separate Trading for Registered Interest and Principal of Securities (STRIPS) market.

The shorter duration coupon STRIPS are going to help the banks reduce the interest rate risk whereas the longer duration STRIPS are expected to find strong demand from pension and provident funds and insurance funds who typically have long term liabilities.

Besides, STRIPS is likely to help in addressing the asset-liability mismatch problem of the banks.