Archive for the ‘Gilt Securities’ Category

Monthly ; Currency, VoA, Debt & Money Market Update

Read my note on Currency, India Macro, VoA, Debt and Money Market.

Download – Monthly Note

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FY15 Borrowing and Fiscal Estimates


I am working with a gross borrowing of ~6.50tn. However note that I haven’t considered cash balance which government will carry next year. Cash balance may range anywhere between 400-550bn. Hence gross borrowing then, excluding cash balance, should come down to 5.95-6.1tn.

Gilts of ~1.68tn will mature in FY15. Incorporating redemptions, net borrowing should come at around 4.8tn. Conventionally RBI raises 90% of its net borrowing via Gsec. Hence total net Gsec supply could come at around 4.3-4.4tn considerably low vs. 4.69tn of net borrowing in FY14

Note – I haven’t incorporated switch effect anywhere above. If government, which had already bought ~120bn of FY15 debt, switches ~200bn by FY14 end then above figure of 4.3-4.4tn for net supply should fall by similar amount i.e. 200bn to 4.1-4.2tn.

I would add duration at current levels however on an incremental basis with a minimum 2 year horizon.

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10Y Bond : Value at Risk(VaR), Expected Shortfall, etc..

Few statistical concepts(VaR, ES, Frequency Distribution, Kurtosis, Skewness) with regard to Indian 10Y bond price.

VAR ES FD Kurtosis Skewness (Download Excel)

Brief description on concepts

VaR – Value at Risk is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. For example, a financial firm may determine that it has a 5% one month value at risk of $100 million. This means that there is a 5% chance that the firm could lose more than $100 million in any given month. Therefore, a $100 million loss should be expected to occur once every 20 months.

Source :

Expected Shortfall – Expected Shortfall is defined as the average of all losses which are greater or equal than VaR.

Source :

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India Macro & Debt Update

Read my note on India Macro & Debt Market Update

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Banks prefers to stay light on bonds

Banks are the biggest investor in the government bond market (holding ~34.5% of outstanding papers). Low interest among banking community to maintain high SLR indeed affects bond prices. Recent spike in yields can be attributed to RBI’s hawkish stance (fear of rate hikes), less OMO expectation, global factors and unfavorable demand supply dynamics.  RBI releases Investment to deposit ratio on a fortnightly basis. Recent numbers stands at ~29.8%(Oct 18, 2013) i.e. out of every 100rs deposit, banks invest ~29.8 in mandatory securities as specified by the RBI from time to time. This ratio is fairly low compared to same period previous year. Investment to deposit ratio as on Oct 19, 2012 was seen at ~30.7%. Normally banks increase SLR holding during uncertain and low growth bouts. Current situation should compel banks to keep investment to deposit ratio high. However that is not the case. This deciphers bank’s fear of taking a hit on P/L due to undue volatility in bond prices. If banks were to maintain a year before ratio of ~30.7% then probably excess demand of 730bn (~15% of net FY14 borrowing) would have supported gilt prices considerably.

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Foreign investment in the Indian Government bond market

Foreign investment in the Indian Government bond market

At a time when lots of chatter is going around with regard to domestic bonds being included in JP Morgan Index and easing some of the restriction over foreign investment in debt market, Ila Patnaik along with other co-authors writes up a paper presenting the logic foreign investment in the Indian Government bond market.

Listing down some text I found to be of importance

The share of the Government bonds outstanding that are owned by foreign investors is meager 1.6% as at end March 2013 far less than then emerging markets.


The Committee on Financial Sector Reforms chaired Raghuram Rajan also recommended steady opening of rupee denominated government and corporate bond markets to foreign investors.

When the policy rate is raised, there are two impacts. Borrowing becomes costlier within India, which reduces demand and thus cools the economy. In addition, when the interest rate in India is higher, more capital comes into India, and the rupee appreciates, which cools the economy. These two effects also work in reverse. When the policy rate is lowered, there is one channel working within India, where demand is increased. In addition, at a lower interest rate, less capital comes into India, and the rupee depreciates, which is expansionary. The second channel has been largely ineffective till date, owing to the capital controls that affect debt flows into India. Changes in the policy rate have a feeble impact on the rupee, as the channels through which foreign investment comes into Indian debt are clogged. While foreign investment into equity is open, equity investment has a low sensitivity to the policy rate. The main impact of monetary policy will come about through debt flows.

It is advantageous to Indian authorities if the bulk of global trading in the rupee takes place in India. When this activity takes place in India, it fosters a deep and liquid market with the comprehensive development of the bond-currency-derivative nexus. This will help improve the monetary policy transmission.

To the extent that foreign investors engage with Indian issuers on Indian soil, and to the extent that their currency trading activities take place in India, the revenue stream for financial services associated with these transactions will accrue to Indian financial firms. This will increase Indian GDP.

Percentage limits on foreign investment: Foreign ownership should be capped at a certain percentage of the outstanding government debt, such as at 10 or 15 percent of the total government debt.

Download Paper

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Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets – Draft Report

These recommendations were made on in May-12 by Gandhi committee in a bid improve liquidity in Gsec and IRD market. After reading this I think one should not ignore recommendations of various committees formed by RBI. The probability of majority of them being implemented is quite high.

Key recommendations:

  • Issuance of securities at various maturity points; to begin with, in the 2-10  year segment (especially near 2 year and 5 year);

(Note Government don’t issue securities with less than 5Y maturity)

  • In the case of MFs, there is an urgent need to address the tax anomaly that exists between ‘equity-oriented’ MF and ‘debt-oriented’ MF to encourage ‘debt-oriented’ MFs.

No Update

  • Buyback or switch operations to retire/extinguish G-Sec with small outstanding amounts;

(Note : India is set to switch debt worth of ~500bn)

  • Encourage long-term gilt funds through appropriate incentives (like taxbreaks, liquidity support, etc); and Consider introducing a web-based system of access to NDS-OM.

No Update

  • FIIs, by being global players, can provide much needed diversity of views in the market thereby providing more opportunities for trading. Thus, the group is of the view that there is a need to encourage FIIs as an investor class in the G-Sec market. Considering the possible effects of sudden exit of investors on capital flow and on market volatility, the Group  recommends that the investment limit for FIIs in G-Sec may be increased in gradual  steps.

(Note: Govt. has gradually increased FII limit and is mulling to get domestic bonds added to emerging market indices.)

  • Withholding tax has been cited as a major roadblock for FII participation in local currency bond markets since withholding tax reduces the investment yield and complicates accounting and transactions procedures for many investors, especially real-money investors. In this regard, the issue needs to be examined comprehensively by the GoI since elimination of withholding tax will lead to long-term benefits for the financial market by improving market efficiency.

(Note: Govt. has already reduced withholding tax for couple of years from 20% to 5%..Approximate revenue from FII withholding tax may be around 600cr)

  • As securities cannot trade during shut-period, a longer shut-period can directly impact the liquidity of the securities. The reduction of the shut-period  in G-Sec to one business day had a positive impact on the tradability of the  G-Sec. Moving ahead, and considering the demat of holding of G-Sec, the  Reserve Bank may consider reviewing the shut-period for G-Sec and consider removing the same for G-Sec in SGL form, if feasible.

No Update

  • Secondary market liquidity in SDLs is affected by the fragmentation of issuances due to the present policy of issuing 10-year securities at every issuance across all the State Governments. In order to improve the secondary market liquidity in SDLs, the group recommends that State Governments may consider reissuance of existing securities to increase the outstanding stock of securities, subject to acceptable rollover risk and redemption pressure. Though such a measure would bring down the weighted average maturity of the outstanding stock for the State Governments, the same would lead to pricing efficiencies in the long-run that may lead to lower borrowing costs.

No Update

  • Consider reissuance/fungibility of T-Bills/CMBs (with identical maturity dates) in the trading and settlement systems.

No Update

  • Consider linking the applicable spread for valuing unquoted SDLs on the  weighted average of the spreads emerging in the last few auctions In this  regard, a suitable framework may be developed for valuation of SDL securities,  which may be reviewed periodically

No Update

  • GoI may consider issuing inflation-indexed bonds specifically for retail/individual investors. In this regard, creating alternate channels of distribution (EDistribution Channels) could be explored.

Partly Executed

Download Full Report

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Valuation of Illiquid G-sec/SDLs

Volume of G-sec is just ~1% of total outstanding Debt i.e. ~30000Cr of 30,00,000Cr outstanding debt. It is also knows that volume is more concentrated in top five liquid papers. Out of ~90Gilt papers only 15-20 are traded daily. There are few which haven’t been traded from many days and months. So how to value this illiquid securities. FIMMDA on a daily basis upload daily price of each G-sec/Floating paper and SDLs using Cubic Spline Valuation method.

Read FIMMDA circular on valuation

Below is the link to download daily price for G-sec and other papers.

The reason why I have highlighted 28022013 is because you will have to tweak the link address to match with required date valuation. Above link is for 28th Feb 2013 valuation sheet. This helps one to understand at what price is RBI going to buy bonds (via OMO facility) if at all it announces to purchase illiquid securities.

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FII Debt Limit Auction – Details

Refer this latest press release of SEBI (SEBI Circular) on enhanced FII debt limit wherein each head is described to its best. One can understand broadly which securities are included under different segments identified by the watchdog. Auction is scheduled on every 20th. FII debt limit auction could be held on the next working day in case 20th happens to be a holiday. Auctions would be held on recognized exchanges like BSE and NSE if free limits greater than Rs1000 crore are available for any of the three categories — Government Securities (G-Sec), corporate bonds and long-term infrastructure corporate bonds. One has to bid in premium terms. FIIs have to utilize these limits within 90 days in case of corporate debt and long-term corporate infrastructure debt. The time period for utilizing G-Sec limits is 45 days. FIIs bid in bps as premium to actual yield. When they feel bonds are undervalued they probably bid with higher premium and vice versa. If an FII bid for Gsec at 8bps then that signifies that he/she is willing to buy Gsec (which is currently trading at 7.5%) at 7.42%. These figures are not released by the exchange and are difficult to find on SEBI’s portal.  An FII can let the auction limit get lapse but that doesn’t mean that they will be refunded with their bid premium.

Find information on most recent auctions here : BSEINDIA & NSEINDIA

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Budget, Gross Borrowing & Net Borrowing Expectation

Budget Expectation – Download Sheet

Appreciate your inputs!!

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