India’s central bank working with ICSDs on international settlement of government bonds
02 September 2021 India
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The Reserve Bank of India (RBI) is working with the Government of India and with the international central securities depositories (ICSDs) to allow international settlement of transactions in Indian government fixed income securities.
This step will expand the investor base for government securities by enabling non-resident Indians (ie Indians living outside of India) to invest in these securities, according to RBI governor Shaktikanta Das.
In his keynote address to the annual conference of the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Primary Dealers’ Association of India (PDAI), the central bank governor said that expanding the investor pool is key to the development of the government securities (G-secs) market.
“The RBI, together with the Indian government, is making efforts to enable international settlement of G-secs through ICSDs. Once operationalised, this will enhance access of non-residents to the G-secs market, as will the inclusion of Indian G-secs in global bond indices, for which efforts are ongoing,” says Das.
Speaking to SFT, a spokesperson from Clearstream, the Luxembourg-based ICSD, confirmed that it is working with RBI to enable international settlement of Indian government securities at the ICSD.
Although the size of India’s government securities market is large relative to most Asian peers, in terms of outstanding securities as a percentage of GDP, the RBI finds that secondary market liquidity can be low in some instances and concentrated in just a few securities and maturities.
“The yield curve accordingly displays kinks,” says Das, “reflecting the liquidity premium commanded by select securities and tenors. We need to develop a yield curve that is liquid across tenors.”
Governor Das also confirmed that efforts were ongoing to improve secondary market liquidity in government securities through changes to securities lending and financing mechanisms.
He said: “liquidity in G-secs markets tends to dry up during periods of rising interest rates or in times of uncertainty. While the market for ‘special repo’ facilitates borrowing of securities, it is worthwhile to consider other alternatives that ensure adequate supply of securities to the market across the spectrum of maturities.”
“It may be recalled that discussion was held on the introduction of a securities lending and borrowing mechanism (SLBM) with a view to augmenting secondary market liquidity by incentivising ‘buy and hold’ type investors (eg insurance companies, pension funds) to make their securities available to other market participants,” says Das.
The RBI comments that useful market feedback was received on this subject [of the SLBM] from FIMMDA and the PDAI.
“I would urge that these discussions be carried forward with a view to evolving market-based mechanisms that enable the lending and borrowing of securities as part of overall market development,” says Das.
Setting the context for this presentation, the central bank governor explained that the government securities market is distinct from other financial markets in a fundamental way – this is the market in which the risk-free rate, a key macroeconomic tool, is established.
He noted that the G-sec market is predominantly an institutional market, with its major participants being bank and long-term investors, including investment funds, pension and insurance funds. Different G-sec instruments are highly substitutable, differentiated primarily by their tenor, and this is “one of the reasons why the G-sec yield curve may be viewed as a public good,” he says.
G-secs provide the most commonly used form of high-quality collateral for payment and settlement systems, liquidity operations and other financial sector transactions, notes the RBI.
Also, monetary policy operations are executed in the G-sec market and monetary transmission is closely linked to the efficient operation of the G-sec market in any market economy.
With these points in mind, Sri Das concludes that the financial system cannot function efficiently without a well-functioning government securities market. Consequently, steps to strengthen the investor base through international settlement in the ICSDs, and measures to boost market liquidity through extension of securities lending mechanisms, are important to the future development of the G-sec market.
This step will expand the investor base for government securities by enabling non-resident Indians (ie Indians living outside of India) to invest in these securities, according to RBI governor Shaktikanta Das.
In his keynote address to the annual conference of the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Primary Dealers’ Association of India (PDAI), the central bank governor said that expanding the investor pool is key to the development of the government securities (G-secs) market.
“The RBI, together with the Indian government, is making efforts to enable international settlement of G-secs through ICSDs. Once operationalised, this will enhance access of non-residents to the G-secs market, as will the inclusion of Indian G-secs in global bond indices, for which efforts are ongoing,” says Das.
Speaking to SFT, a spokesperson from Clearstream, the Luxembourg-based ICSD, confirmed that it is working with RBI to enable international settlement of Indian government securities at the ICSD.
Although the size of India’s government securities market is large relative to most Asian peers, in terms of outstanding securities as a percentage of GDP, the RBI finds that secondary market liquidity can be low in some instances and concentrated in just a few securities and maturities.
“The yield curve accordingly displays kinks,” says Das, “reflecting the liquidity premium commanded by select securities and tenors. We need to develop a yield curve that is liquid across tenors.”
Governor Das also confirmed that efforts were ongoing to improve secondary market liquidity in government securities through changes to securities lending and financing mechanisms.
He said: “liquidity in G-secs markets tends to dry up during periods of rising interest rates or in times of uncertainty. While the market for ‘special repo’ facilitates borrowing of securities, it is worthwhile to consider other alternatives that ensure adequate supply of securities to the market across the spectrum of maturities.”
“It may be recalled that discussion was held on the introduction of a securities lending and borrowing mechanism (SLBM) with a view to augmenting secondary market liquidity by incentivising ‘buy and hold’ type investors (eg insurance companies, pension funds) to make their securities available to other market participants,” says Das.
The RBI comments that useful market feedback was received on this subject [of the SLBM] from FIMMDA and the PDAI.
“I would urge that these discussions be carried forward with a view to evolving market-based mechanisms that enable the lending and borrowing of securities as part of overall market development,” says Das.
Setting the context for this presentation, the central bank governor explained that the government securities market is distinct from other financial markets in a fundamental way – this is the market in which the risk-free rate, a key macroeconomic tool, is established.
He noted that the G-sec market is predominantly an institutional market, with its major participants being bank and long-term investors, including investment funds, pension and insurance funds. Different G-sec instruments are highly substitutable, differentiated primarily by their tenor, and this is “one of the reasons why the G-sec yield curve may be viewed as a public good,” he says.
G-secs provide the most commonly used form of high-quality collateral for payment and settlement systems, liquidity operations and other financial sector transactions, notes the RBI.
Also, monetary policy operations are executed in the G-sec market and monetary transmission is closely linked to the efficient operation of the G-sec market in any market economy.
With these points in mind, Sri Das concludes that the financial system cannot function efficiently without a well-functioning government securities market. Consequently, steps to strengthen the investor base through international settlement in the ICSDs, and measures to boost market liquidity through extension of securities lending mechanisms, are important to the future development of the G-sec market.
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