RBI spells out debt strategy for medium term

The Reserve Bank of India (RBI) on Thursday said India's debt management strategy would be based on three broad pillars - low cost, risk mitigation and market development.

In its medium-term debt management strategy for the years 2015-16 to 2017-18, RBI said the economy will record moderate to reasonable growth, a moderation in inflation according to the path projected by the central bank and financial stability. Also, the economy is expected to remain resilient due to favourable domestic macroeconomic factors backed by stable growth with low inflation, RBI said.

In this backdrop, RBI would increase the average maturity period of bonds that it borrows from the market. This will allow the country to avoid frequent rollover risks.

"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 per cent by fiscal year 2020-21 from present level of 58.59% (as at end-March March 2015)," RBI said in its strategy paper.

To achieve this, the central bank will be undertaking switches or buybacks from less than 10 years' maturity.

"This would help in reducing the redemption concentration and create space for further issuances that may be needed to meet the demand of market participants interested in this segment."

RBI will continue to issue moderate amounts in less than 10 years' maturity bucket, but will increase issuances in 10-14 years' tenor as this particular segment sees robust demand from banks and other investors. In addition, bonds in tenors of more than 15 years to cater to needs of insurance companies and provident funds would continue. "Issuance of longer tenor bonds beyond 30 years will be undertaken to match demand from insurance companies and provident funds," it said, adding the 40-year bond issuance in October 2015 saw quite robust demand. Switch calendars would be announced to communicate effectively about such buyback to be undertaken by banks.

RBI's debt management strategy would be reviewed annually and rolled over for the next three years, the central bank said. While for now the scope is limited to active elements of domestic debt of central government, over time, the scope would be progressively expanded to cover the entire stock of outstanding debt, including external debt as well as state development loans.

RBI and the government will continue to develop the government bond market by a series of measures such as "introducing new instruments, expanding the investor base, strengthening market infrastructure, etc.," the central bank said.

The investor base must be stable and diversified, and there should be an appropriate mix of domestic and foreign currency debt in portfolio.

While raising foreign currency debt is cost effective and provide a wide and varied investor base, a country with large foreign currency liabilities is exposed to currency risks, which could impact macroeconomic stability.

"As a conscious strategy, issuance of external debt (denominated in foreign currency) is kept very low in India and external debt as percentage of central government's public debt has come down from around 12 per cent in 2006-07 to around 7.5 per cent during 2014-15," RBI said.