The Reserve Bank of India (RBI) is closely working with the Central Government to enable international settlement of government securities (G-Secs) and incorporation of the local bonds in global bond indices to broaden the investor base, Governor Shaktikanta Das said on Tuesday.

       He reiterated his stance that the G-Sec is a "public good", as it is the benchmark for pricing various instruments in the economy. RBI's endeavour has remained an "orderly evolution of the yield curve," with this in mind.

       “The RBI, together with the Government, is making efforts to enable international settlement of transactions in G-secs through International Central Securities Depositories (ICSDs),” Das said.

       “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,” Governor Das said, while delivering his keynote address at the annual event of FIMMDA-PDAI, two bond investors association bodies. Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers Association of India (PDAI) were having their 21st annual meeting virtually.

       “Expansion of the investor base is key to further development of the market,” Governor Das said.

       To widen the investor base, the RBI has introduced a ‘retail direct’ scheme for retail investors, which is expected to tap existing savings of households towards the safest asset in the country. He urged FIMMDA-PDAI to focus more on the STRIPS (Separate Trading of Registered Interest and Principal of Securities) segment so that it gains popularity among such investors.

       The RBI Governor quoted a Bank for International Settlements (BIS) study that had found that the G-Sec market in India, measured in terms of outstanding stock as a per cent of GDP, is large relative to most Asian peers, and the bid-ask spreads among the best.

       Even as the Indian G-Sec markets remain “cutting-edge” and more sophisticated than others, there is still scope for the market to develop in sync with the emerging requirements, according to Das.

       For example, the secondary market liquidity dries up on several occasions and concentrates on a few securities and tenors, which results in “kinks” in the yield curve. He blamed the market microstructure in India, where ‘buy and hold’ and ‘long only’ investors prevail, for this. “We need to develop a yield curve that is liquid across tenors,” he stressed.

       To prevent the G-secs liquidity from drying up during periods of rising interest rates or in times of uncertainty, the governor stressed alternatives. While there is a ‘special repo’ that enables borrowing of securities, discussions are also on to introduce Securities Lending and Borrowing Mechanism (SLBM) that would enable insurance and pension firms to lend their securities in the market for a profit.

       “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,” Governor Das said.

       The RBI Governor also stressed the need to develop the interest rate derivatives markets further. Even as there is a wide range of products available in the market, the “only major liquid product” continues to be the Mumbai Interbank Offer Rate (MIBOR) based Overnight Indexed Swaps (OIS) market.

       The participants in these markets are also largely limited to foreign banks, private banks and primary dealers. However, he noted that the ‘swaptions’ product is gaining traction. Still, it could be an opportune time to consider new instruments to facilitate hedging of long-term interest rate and reinvestment risk by insurance companies, provident and pension funds and the corporate sector.

       “On its part, the Reserve Bank will endeavour to ensure adequate liquidity in the G-sec market as an integral element of its effort to maintain comfortable liquidity conditions in the system,” he said.

       The Governor also said that even after its regular variable rate reverse repo (VRRR) auctions, through which the RBI plans to suck out up to Rs 4 trillion of excess liquidity from the market, the central bank will also conduct “fine-tuning operations from time to time as needed to manage unanticipated and one-off liquidity flows so that liquid conditions in the system evolve in a balanced and evenly distributed manner.”