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