The central government has decided to convert Rs 5,000 crore worth of outstanding special securities into a eight-year paper at a yield of 11.19 per cent.
Total stock of outstanding securities at the end of the last financial year was Rs 1,06,000 crore. Prior to yesterdays conversion the government had converted Rs 5,000 crore worth of securities into a ten year paper at a yield of 13.05 per cent and a similar amount into a seven year paper at 12.59 per cent.
In the current financial year the government has been taking advantage of the declining interest rates to convert the special securities which are in the nature of perpetuities into a finite paper.
Special securities are a remnant of the era when the practice of issuing ad hoc treasury bills for funding the budget deficit was in vogue.
The outstanding stock of treasury bills used to be reclassified as special securities at the end of the financial year. The special securities were in the nature of perpetual bonds bearing a coupon of 4.6 per cent. The outstanding stock of special securities are held by the central bank. The system of issue of ad hoc treasury bills was dispensed with and replaced by the system of ways and means advances (WMA). The system of WMA unlike that of ad hocs is not an automatic source of monetisation of the governments deficit.
In the past Y V Reddy, deputy governor, Reserve Bank of India, has mentioned that the special securities will be converted into marketable lots and used by Reserve Bank for its open market operations. This is what has been achieved by the conversion of a portion of special securities into dated paper with a finite maturity.
It should however be realised that the conversion of special securities is more than a book entry. The interest burden of the government is going up from the historical level of 4.6 per cent.
Issues relating to the conversion and redemption of the outstanding stock of special securities should be seen in light of the need for reducing the stock of outstanding debt. The Ministry of Finance is reportedly working on a discussion paper on the subject of reducing the stock of public debt and the possibility of imposing a ceiling on it.
