Main Note - [G-Secs-Primary Market](G-Secs-Primary%20Market.md)
## Strategy
There are two institutions involved here: Department of Economic Affairs, Ministry of Finance, Govt. of India, and the Internal Debt Management Department, RBI
1. The debt management function within the Ministry of Finance is primarily handled by the Department of Economic Affairs (DEA), Budget Division, specifically through its [Public Debt Management Cell (PDMC)](https://dea.gov.in/public-debt-management-cell). This cell was set up in [2016](GoI_Office%20Memorandum_20161004_Setting%20up%20a%20Public%20Debt%20Management%20Cell%20(PDMC)%20in%20Budget%20Division,%20Department%20of%20Economic%20Affairs,%20Ministry%20of%20Finance.pdf).
2. The sovereign external debt is managed (policy, monitoring, reporting) by the External Debt Management Unit (EDMU) under the Economic Division, Department of Economic Affairs (DEA), Ministry of Finance.
3. The [main activity](https://www.rbi.org.in/commonman/english/scripts/Departments.aspx#INTERNAL:~:text=Top-,Internal%20Debt%20Management%20Department,-The%20main%20activities) of the [Internal Debt Management Department](https://rbi.org.in/scripts/PublicationsView.aspx?Id=11356) of the RBI is to manage the public debt of Government of India/ State Governments.
4. Independent Debt Management:
1. The issue of separate Public Debt Management Agency (PDMA), that is an Independent Debt Management Office, in India to separate debt management from monetary policy (currently with RBI) has been recommended by ==several committees:==
1. [May 1997](RBI_Report_1997_Committee%20on%20Capital%20Account%20Convertibility%20(1997)_Chairman-S.S.Tarapore_Tarapore%20Committee-1.pdf) - Committee on Capital Account Convertibility (1997, chaired by S.S. Tarapore), RBI
2. Dec, 1997 - Working Group on Separation of Debt Management from Monetary Management (Chairman-V. Subrahmanyam), RBI (*mentioned in the Annual report of 2001*).
3. [September 2000](RBI_Group:Committee_200009_Report%20of%20The%20Advisory%20Group%20on%20Transparency%20in%20Monetary%20and%20Financial%20Policies_Chairman-Narasimham.pdf) - Advisory Group on Transparency in Monetary and Exchange Rate Policies (2000), RBI
4. 2001 - Internal Expert Group on the Need for a Middle Office for Public Debt Management (Arvind Virmani, 2001), Ministry of Finance
5. [Aug 28, 2001](https://rbi.org.in/Scripts/AnnualReportMainDisplay.aspx) - Annual report of 2000-01, RBI
6. [August, 2003](https://www.indiacode.nic.in/bitstream/123456789/2064/1/a2003-39.pdf) - FRBM Act, 2003
7. 2004 - Task Force on the Ministry of Finance for 21st Century (Chairman-Vijay Kelkar), Ministry of Finance
8. [July 16, 2004](GoI_Group-Committee_20040716_Report%20of%20Task%20Force%20on%20Implementation%20of%20the%20FRBM%20Act_Chairman-Vijay%20Kelkar.pdf) - Task Force on Implementation of the FRBM Act (Chairman-Vijay Kelkar), Ministry of Finance
9. [Sep 1, 2006](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=468) - the Committee on Fuller Capital Account Convertibility (2006)
10. [Sep 12, 2008](RBI_Report:Committee_20080912_Committee%20on%20Financial%20Sector%20Reforms_2008_A%20Hundred%20Small%20Steps_Chairman-Raghuram%20Rajan.pdf) - High Level Committee on Financial Sector Reforms (2008), RBI
11. [October 2008](http://dea.gov.in/files/other_reports_documents/Report_Internal_Working_Group_on_Debt_Management.pdf) - Internal Working Group on Debt Management (Jahangir Aziz Report, October 2008), Ministry of Finance
12. [March 25, 2009](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=10275) - Committee on Financial Sector Assessment (6 volumes) (Chairman-Rakesh Mohan), RBI
13. [2012](GoI_Group-Committee_2012_Report%20of%20the%20Working%20Group%20on%20Debt%20Management%20Office_FSLRC.pdf) - Report of the Working Group on Debt Management Office (Chairman-Govinda Rao), FSLRC
14. [Sep, 2012](https://dea.gov.in/files/other_reports_documents/Kelkar_Committee_Report.pdf) - Report of the Committee on Roadmap for Fiscal Consolidation (Chairman-Vijay Kelkar), Ministry of Finance
15. March, 2013 ([Vol-1](GoI_Group-Committee_201303_Report%20of%20the%20Financial%20Sector%20Legislative%20Reforms%20Commission_Vol-1.pdf) & [Vol-2](GoI_Group-Committee_201303_Report%20of%20the%20Financial%20Sector%20Legislative%20Reforms%20Commission_Vol-2.pdf)) - Financial Sector Legislative Reforms Commission (FSLRC) (Chairman: B.N. Srikrishna), 2013, Ministry of Finance
16. [Feb 28, 2015](https://www.indiabudget.gov.in/budget2015-2016/ub2015-16/fb/bill.pdf) - The Finance Bill, 2015, proposed to establish autonomous/independent Public Debt Management Agency (PDMA) but it was not implemented.
5. Here we discuss about RBI's debt management strategy.
6. The objective of the debt management strategy (DMS) is to secure the government’s funding at all times at low cost over the medium /long-term while avoiding excessive risk, and is restricted to active elements of domestic debt management, i.e., marketable debt of the Central Government.
7. It revolves around three broad pillars - Lower cost, Risk Mitigation, Market Development
1. Low cost. This can be divided as:
1. when to issue - this includes appropriate issuance strategy based on market conditions, planned issuances and adopting a transparent practice of announcing these dates by way of a detailed issuance calendar. So here the overall aim is to maintain a transparency and predictability in borrowing plans.
2. what to issue - offer of appropriate instruments to lower cost in medium to long-run
3. whom to issue - developing financial markets, offer of appropriate mix of instruments meeting the preferences of various investor segments and thereby broadening the investor base
2. Risk mitigation (interest rate, foreign currency risk, rollover, creditor-concentration) and market development.
1. **Interest rate** - In case of floating rate instruments, the interest rate risks are related to re-fixing. In India a variety of instruments have been issued, such as
1. Fixed Rate Conventional Bonds,
2. Linkers (floating rate instruments)
1. Floating Rate Bonds (FRBs) which offer National Savings Certificate (NSC) rate plus a spread of 35 basis points (0.35%) or rate linked to 182-day T-bills+spread,
2. Indexed bonds - capital Indexed Bonds (CIBs), Inflation Indexed Bonds (IIBs)
But the contribution of linkers (FRBs, indexed bonds like CIBs, IIBs) has remained small, that is floating rate debt constitutes a small portion of marketable debt, thereby limiting interest rate risk in the debt portfolio.
3. Zero Coupon Bonds
2. **Foreign currency risk** - As on Dec-2026, India has not issued sovereign debt securities denominated in foreign currency. The external sovereign debt is in form of [[Forex Market Interventions and Sterilisation#^b264c4|bilateral and multilateral loans]]
1. Raising debt in foreign currency could be cost effective and provide a wide and varied investor base.
2. In a capital-scarce country like India, overseas sovereign bonds provide an additional source of savings. When FPIs buy these bonds, they bring in foreign currency, which the RBI converts into rupees for the government. This effectively relaxes domestic financing constraints.
3. But a country with large foreign currency denominated liabilities is, however, exposed to “currency/exchange rate risks” which could impact macro-economic stability.
4. Further, dependence on foreign currency debt could mean sharp volatility in interest rate and market volumes linked to the uncertainty of external events.
5. Thus participation of foreign investors in the domestic bond markets also needs to be examined in the light of our policy stance relating to calibrated approach to capital account convertibility and the possibility of interest rate and exchange rate volatility due to reversal of capital flows.
6. There was also a proposal for issuance of overseas sovereign bonds by former finance secretary Subhash Chandra Garg in 2018.
3. **Rollover risk** - It is contained by elongation of maturity through switches / buy back and establishing limits on security issuances and annual maturities.
3. **Market Development**
8. Due to global financial crisis, European sovereign debt crisis and related developments, there were increased volatility and uncertainty in the financial markets. Like other economies, India had also embarked on a program of fiscal stimulus to revitalise the economy resulting in accelerated borrowings. As a result, ==gross market borrowing of Government of India has increased by nearly 400 percent during the 7 years, that is from 2009 to 2015.==
9. During 2008-10, RBI did few things to successfully complete the large borrowing programmes:
1. It front loaded the borrowing,
2. De-sequestered [[Market Stabilisation Scheme (MSS), 2004#Impact on Government's Account|MSS]] balances ( that is allowed to be used for the government expenditure) and
3. shortened average maturity of issuances (but once the markets stabilized, RBI embarked on elongation of maturity).
10. Debt market is guided by many factors like:
1. monetary policy stance,
2. inflation,
3. political stability (prevalence of a stable government in India),
4. fiscal consolidation,
5. pickup in the private sector credit,
6. CRR, SLR and HTM,
7. the policy stance on foreign portfolio investment in G-sec, etc
1. FPIs widen and diversifying the investor base which improves demand for government bonds but the issues of financial instability arising from sudden-stop and reversal risks, like during the taper tantrum should also be considered.
8. current account deficit,
9. stability on currency front,
10. geo-political landscape in developed countries,
11. commodity prices like that of crude oil and gold,
12. state of the Euro Zone economy, US economy, China
11. Even after fiscal consolidation, the government is likely to continue running fiscal deficits (and hence the gross bond supply would remain elevated) in the foreseeable future because of:
1. accumulated debt stock that needs to be rolled over,
2. as also the country's growing GDP.
12. Why RBI does not allow international trading and settlements of Indian government bonds through global securities settlements systems like Euroclear?
1. There is a downside risks such as liquidity getting fragmented as some of the FPIs presently operating in India may like to move off-shore
2. The move would lead to the development of a parallel Government securities yield curve outside India, thereby creating yet another NDF-like market overseas with all the attendant issues.
3. Indian G-Secs are settled exclusively domestically through CCIL.
13. The aim of RBI here is to build a low risk portfolio at a low cost by elongating the maturity for reducing rollover risk, maintaining large benchmark issuances to foster liquidity, a low level of foreign currency debt and a large domestic investor base.
14. **Tenor of securities**
1. Borrowing strategy has been prepared in such a manner that the maturity profile is elongated to reduce redemption pressures in the near term. As a result, no market borrowing has been proposed in the 0-5 year time bucket.
2. The maturities range between 5-40 years.
3. In line with the strategy of elongating maturity, the proposed benchmark for weighted average maturity of the debt portfolio is 10 $\pm$ 2 years.
15. ==[3 Concepts](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=227#:~:text=to%20clarify%20the%20three%20concepts%20viz): Budget Deficit, the Monetised Deficit or the net RBI credit to the Government and RBI's support in primary issues of Central Government securities.==
## Related Notes
1. [G-Secs-Primary Market](G-Secs-Primary%20Market.md)
2. [Internal Debt Management Department](Internal%20Debt%20Management%20Department.md)
## Further Reading
1. RBI. (Dec 31, 2015). ==Debt Management Strategy for India (2015-18)==. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=837)
2. RBI. (2015, January 19). ==Changing Contours of Debt Management==. Address by Shri G Padmanabhan, Executive Director at the Annual Meet of Primary Dealers Association of India on January 17, 2015. [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=936)
3. Reports of the Comptroller and Auditor General of India on Compliance of the Fiscal Responsibility and Budget Management Act, 2003 for a financial year.
4. Harun R Khan. Aug 12, 2014. ==Public Debt Management: Reflections on Strategy & Structure==. (Based on the keynote address delivered by Shri Harun R Khan, Deputy Governor, Reserve Bank of India at the 9th Annual International Conference on “Public Policy & Management: Debt Management” at Indian Institute of Management, Bangalore on August 11, 2014). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=909) [^6]
5. [Public Debt Management: Reflections on Strategy & Structure](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=909) [^6]
6. IMF. (Mar, 2015). IMF’s Article IV Consultation Staff Report.
7. **Dr Duvvuri Subbarao in an interview with the WSJ** - In an interview published in _The Wall Street Journal_ and conducted by Alex Frangos, Dr Duvvuri Subbarao, the then Governor of the Reserve Bank of India, spoke about the [ role of Central Bank as a debt-manager to the govt.](Duvvuri%20Subbarao%20-%20%20Interview%20with%20the%20WSJ%20(February%2013,%202012).md#Central%20Bank%20as%20a%20debt-manager%20to%20the%20govt.)