SDL-based STRIPS: Use for duration matching, not for tactical gains

Invest for more than 12 months to enjoy favourable tax treatment

Starting June 12, the Reserve Bank of India (RBI) has permitted the use of the separate trading of registered interest and principal of securities (STRIPS) mechanism for State Development Loans (SDLs). It was earlier allowed for central government securities (G-Secs).

 

“This will enhance price discovery, deepen liquidity, and pave the way for a transparent zero-coupon yield curve in state debt,” says Vishal Goenka, cofounder, IndiaBonds.com.

 

Understanding STRIPS

 

STRIPS involve breaking a standard bond — comprising regular interest (coupon) payments and a final principal repayment — into individual zero-coupon instruments.

 

“These zero-coupon government securities do not pay periodic interest, but are