govt. securities market ppt

GOVERNMENT SECURITIES

MARKET (GSM)

PrakyathIInd M.ComPoornaprajna Evening College Poornaprajna Post –graduation CentreUdupi

INTRODUCTION :

A Government security is a tradable instrument issued by the Central Government or the State Government. It acknowledges the Government’s debt obligation. Such securities are issued for short term or long term. Government needs large amount to carry on its welfare activities.

MEANING :

A government security is a bond or other type of debt obligation that is issued by a government with a promise of repayment upon the security's maturity date. Government securities are usually considered low-risk investments because they are backed by the taxing power of a government.

OBJECTIVES/FEATURES OF GOVT. SECURITIES :

Govt. securities are sovereign debt obligations of govt. of India either central or any other authority of govt.

Govt. securities include central govt. & state govt. securities, Treasury Bill & Govt. guaranteed bonds.

The terms of govt. securities range from 92 days to 30 years.

HOW ARE THE GOVT. SECURITIES ISSUED :

Govt. securities are issued through auctions conducted by the RBI. Auctions are conducted on the electronic platform called the NDS-Auction platform. Commercial Banks, Scheduled Co-operative Banks, Primary Dealers, Insurance Companies & Provident Funds, who maintain finds accounts (Current account) & Securities account (SGL account) with RBI. Are the members of this electronic platform.

38%

9%

0%

22%

0%

3%0%

3%

1%

7%

12%

4%

Holder Profile in Central Govt. securities as on end Mar 2010

1. Commercial Banks2. Bank- Primary Dealers3. Non-Bank PDs4. Insurance Companies5. Mutual Funds6. Co-operative Banks7. Financial Institutions8. Corporates9. FIIs10. Provident Funds11. RBI12. Others

TYPES OF GOVERNMENT SECURITIES :

Treasury Bills or T-bills : issued on a discount basis. maturities up to 52 weeks and lesser than it. Treasury bills or T-bills, which are money market

instruments, are short term debt instruments issued by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-.


Cash Management Bills (CMBs) : Government of India, in consultation with the Reserve

Bank of India, has decided to issue a new short-term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than 91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure, notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the Government.


Treasury Notes : longer term than T-bills. from one to ten years. semiannual coupon payments. current owners are registered. issued in denominations of ₹.1000 or more. active secondary market.


Treasury Bonds : maturities greater than ten years. denominations in ₹.1,000 or more . some have call provisions.

Savings Bonds : nonmarketable and offered only to individuals. pure discount bonds. mature in 20 years with semiannual coupon payments.


Dated Government Securities : Dated Government securities are long term securities and carry a

fixed or floating coupon (interest rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated securities can be up to 30 years.

Zero Coupon Treasury Security Receipts or Coupon stripping : Treasury bonds are purchased and placed in trust with a custodian. sets of receipts issued for each coupon date. another set of receipts issued for certain maturity dates. Zero coupon means no interest. Issued at a discount price.

GSM- STRENGTHS (1) Large supply of securities

Enabling creation of benchmark securities with sufficient outstanding stock.

Issuances across the yield curve. ‘State of the Art’ primary issuance process.

Electronic bidding. Faster processing. Flexibility to dispose of securities on the same day.

Well capitalized and efficient Primary Dealer System 100% of the notified amount underwritten

GSM-STRENGTHS (2) Sound Depository system

Proprietary and custodial accounts Complete dematerialization

‘State of the Art’ market infrastructure Mandatory reporting –NDS Trading systems – NDS-OM (above 80 percent of trades) Real time price dissemination Clearing and settlement, Guaranteed settlement.

Availability of instruments and processes Short sale ‘When Issued’ STRIPS Security Financing Repo

GSM-STRENGTHS (4)• Predominant holding by residents

– No default risk perception – a sovereign will not default on debt in its own currency

– marginal susceptibility to exchange rate volatilities

• Sophisticated participants– Enabling adoption of advanced techniques and

processes• Non participation of RBI in primary market

– Facilitating market based price discovery• Close coordination between

– debt and monetary managements– monetary and fiscal policies

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

1000000

2000000

3000000

4000000

5000000

6000000

7000000

Growth in Outright and repo settlement volumes (in Rs. Crore)

G-sec Repo

GSM-WEAKNESSES (1) • Fiscal dominance

– Supply outstripping demand• Illiquidity

– HTM regime for SLR securities. Any alternative?• Skewed investor base

– banks, Insurance Companies and RBI account for sizeable portion of outstanding stock

• Active participants with similar IR exposures– Herding.

GSM-WEAKNESSES (2)• Absence of Term Money market• Lack of retail interest• Absence of market making• Not much activity in

– Short selling• Participants’ inertia – Lazy treasuries?

– Participants do not come in till liquidity improves– Liquidity will not improve till participants come– Chicken and Egg problem

GSM OPPORTUNITIES (1) Latecomer’s advantage - development can

be based on wider experience Tap latent investor base

Nascent pension sector- a potential large investor

Market G-secs as another investment product, not as a mandated product Enhance liquidity Increase policy Scope.

GSM OPPORTUNITIES (2) Innovate and introduce new products

To suit diverse investor interests• Inflation Indexed Bonds• Interest Rate Options

Scope for calibrated increase in FII participation Reduce the load on domestic investors and free

domestic resources To be considered in light of other implications-

interest rate and exchange rate volatility.

GSM THREATS (1) Low volume markets vulnerable to

manipulation Underdeveloped domestic markets for

hedging products may encourage migration off-shore Opacity of off-shore markets and difficulty of

monitoring and regulation Lack of sophistication by certain participants Shallowness of the market

Rapid opening may cause excessive volatility Slower opening results in losses due to missed

opportunities.

GSM THREATS (2) Pressure for rapid opening of rupee debt

market to foreign participation Sovereign insulated from exchange risk But the market exposed to Interest Rate and

Exchange Rate volatility Migration to IFRS – implications for valuation

and recognition of P & L.

THANK YOU…

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govt. securities market ppt

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