The Reserve Bank successfully completed the borrowing programme of the Government of India and the state governments during 2014-15 despite several challenges, such as scaling up of the size of borrowing and elevated yields in the first half of the year. It continued the strategy of elongating the maturity, consolidating the debt portfolio and imparting more liquidity to the secondary market. In pursuance of the objective of minimising the rollover risk, the maturity profile of the debt portfolio was elongated during the year with a resultant marginal increase in weighted cost. Leveraging on increased appetite for longer maturity debt, the Reserve Bank announced issuance of 40-year security during 2015-16 to extend the yield curve beyond 30 years. A medium term debt management strategy in line with sound international practices, regular quarterly calendar for state borrowings, review of the WMA scheme for the states, an efficient market infrastructure to aid a deeper and wider government debt market and expanding the investors’ base, are some of the important agenda items slated for 2015-16.

VII.1 In terms of Sections 20 and 21 of the Reserve Bank of India Act, 1934, the Reserve Bank has the obligation and right to transact Central Government business in India and manage its public debt. Similarly, the Reserve Bank is the debt manager for all the 29 state governments and the union territory of Puducherry as also a banker to them except the Government of Sikkim in terms of their agreement with the Reserve Bank under Section 21A of the RBI Act, 1934. Further, the Reserve Bank makes advances to the Central and state governments to tide over temporary mismatch in the cash flows. Such advances are termed as ‘ways and means advances’ (WMA), which are repayable in each case not later than three months from the date of making the advances in terms of Section 17 (5) of the RBI Act.

VII.2 The Reserve Bank has set for itself a medium-term agenda of transforming the financial sector into a stronger, deeper, more efficient and inclusive system. Within this broader agenda, the approach for debt management as entrusted to the Internal Debt Management Department (IDMD) encompasses: a comprehensive debt management strategy in alignment with sound international practices, minimising the borrowing cost, extending maturities to cater to the requirements of diverse investors, consolidation of public debt and reduction in the rollover risk through active switch/buyback operations.

Agenda and Implementation Status in 2014-15

VII.3 In 2014-15, the debt management strategy aimed to:

i. conduct debt management operations in an orderly manner and successfully meet the market borrowing programmes in a smooth and non-disruptive manner while minimising the cost of borrowing;

ii. ensure reasonable distribution in issuances over the first half and the second half with issuance of new bonds coupled with bonds of non-standard maturity to avoid concentration of redemptions in the first half of the year;

iii. smoothen the maturity profile of GoI securities to reduce redemption pressures in 2014-15 through buybacks/switches;

iv. ensure quicker and wider dissemination of auction related information to market participants and other stakeholders;

v. promote liquidity in government securities (G-secs) through a scheme for market making by PDs in semi-liquid and illiquid G-secs; and

vi. improve efficiency of cash management and ensure reasonable returns on the CSF/GRF (consolidated sinking fund/guarantee redemption fund) of the states.

DEBT MANAGEMENT OF THE CENTRAL GOVERNMENT

VII.4 The gross market borrowings of ₹5,920 billion (BE ₹6,000 billion) and net market borrowings of ₹4,532 billion, which funded 90.3 per cent of the gross fiscal deficit (GFD), were successfully raised in 2014-15 (Table VII.1). With relatively comfortable liquidity and stable market conditions during 2014- 15, there was lower devolvement of ₹53 billion on primary dealers (PDs) on three occasions as compared with 26 instances amounting to ₹175 billion in 2013-14.

VII.5 Debt management operations faced several challenges during 2014-15. First, the combined market borrowings of the Centre and the states increased over the level in the preceding year in both gross and net terms (that is, net of repayments) resulting in a sizeable scaling up of debt issuances in the primary market, particularly for the states. The Reserve Bank held auctions of government securities (including T-bills and SDLs or state development loans) on 118 days, leading to a total of 548 issuances and 41 underwriting auctions. Second, elevated level of yields in the first half of the year when the borrowing programme was frontloaded posed challenges for the cost of borrowing. Under these testing conditions, the efficacy of debt management can be gauged from the modest 12 bps increase in the weighted average yield of dated securities issued by the Centre during the year to 8.51 per cent (Table VII.2) despite a lengthening of maturity. Third, the Reserve Bank continued debt consolidation through reissuances and eased redemption pressures through buybacks/switches during the year and also elongated the maturity profile of government debt, thereby mitigating rollover risks.

VII.6 Although yields on government dated securities gradually declined during the course of the year from relatively higher levels in the early months (Chart VII.1), the weighted average yield of dated securities issued during 2014-15 was somewhat higher than in the previous year. Higher issuances of long dated securities lengthened the average maturity of outstanding debt (Table VII.3).

VII.7 As part of the consolidation of Government debt, 95 per cent of the securities were reissued. Buybacks/switches were conducted to smoothen the maturity profile of GoI securities and reduce redemption pressures. Buyback of short-term securities amounting to ₹188 billion from the market was completed through reverse auctions in September 2014 and switches of ₹88 billion were conducted in February 2015. A conversion operation of securities from the Reserve Bank’s portfolio amounting to ₹302 billion was conducted in March 2015. By these measures, the Reserve Bank ensured the elongation of maturity of the outstanding debt while containing the rollover risk for GoI.

VII.8 Commercial banks remained predominant investors in dated government securities, holding around 43 per cent at end-March 2015, followed by insurance companies and provident funds at around 21 and 8 per cent, respectively. The share of the Reserve Bank’s holding declined to 14 per cent from a high of 16 per cent in the previous two years. The share of foreign portfolio investors (FPIs), which have emerged as active market players in the recent period, more than doubled to 3.7 per cent from a year ago.

VII.9 Net market borrowings of the Centre through treasury bills and dated securities stood at ₹4,779 billion in 2014-15, 6 per cent lower than those in 2013-14. Yields on treasury bills also softened at the shorter end in 2014-15 reflecting comfortable liquidity conditions. Continuing its pursuit of the market development strategy, the Reserve Bank ensured quicker and wider dissemination of auction related information among market participants and other stakeholders. The system of displaying primary auction results of treasury bills, SDLs and GoI dated securities in e-Kuber and NDS-OM along with publication of the results on the Reserve Bank’s website has been implemented.

Cash Management

VII.10 The Government started the fiscal year with a cash build-up of ₹1,284 billion and the cash position remained comfortable until the third week of May 2014 (Chart VII.2). Following spending by the Government, cash balance declined and the Government intermittently availed WMA for 61 days altogether vis-à-vis 42 days during the previous year. It also issued cash management bills (CMBs) for ₹100 billion in November 2014.

VII.11 From December 16, 2014 onwards, the Government’s cash balance held with the Reserve Bank is being reckoned for auction through variable rate repo as part of the Reserve Bank’s revised liquidity management framework. The Government ended the fiscal year with a cash balance of ₹1,573 billion.

VII.12 WMA limits for the first half (April-September) and the second half (October-March) of 2014-15 were fixed at ₹350 billion and ₹200 billion, respectively, for the Central Government. The WMA limit for the first half of 2015-16 was raised to ₹450 billion.

DEBT MANAGEMENT OF STATE GOVERNMENTS

Market Borrowings

VII.13 The Reserve Bank entered into an agreement with the Government of Telangana for carrying out its cash and debt management operations effective June 2, 2014, under Section 21A of the Reserve Bank of India Act, 1934.With this, the Reserve Bank is now the debt manager for all the 29 states and for the union territory (UT) of Puducherry. All of them participated in market borrowing programme in 2014-15, with the net borrowing rising by 26 per cent (Table VII.4).

VII.14 Despite higher market borrowings, the weighted average yeild of state government securities issued during the year stood lower at 8.58 per cent as compared to 9.18 per cent last year. Alongside, the weighted average spread came down significantly to 38 bps over GoI securities of comparable maturities from 75 bps in the previous year (Table VII.4).

Cash Management of State Governments

VII.15 The Reserve Bank has been extending WMA to state governments since 1937 under the provisions of Section 17(5) of the RBI Act with the objective of covering temporary mismatches in their cash flows. There are two types of WMA: (i) normal WMA or clean advances, and (ii) special WMA (SWMA) or secured advances (the nomenclature of SWMA was changed in June 2014 as ‘special drawing facility’ (SDF) by amending the agreement with state governments). An overdraft (OD) occurs whenever the Reserve Bank’s credit to a state government exceeds the SDF and WMA limits.

VII.16 The aggregate WMA limit for the states, including the Government of the Union Territory of Puducherry was raised by 50 per cent to ₹154 billion in November 2013 and the same limit was continued in 2014-15. The monthly average utilisation of WMA and OD by the states was higher in 2014-15 even as the number of states resorting to WMA remained unchanged at 12. Fourteen states resorted to SDF, up from 12 in 2013-14. Ten states availed of OD in 2014-15 as against eight states in 2013-14.

VII.17 The Reserve Bank’s recent initiatives in the government banking business are expected to enhance efficiency in the cash management of state governments (Box VII.1).

Investments in the Consolidated Sinking Fund (CSF)/Guarantee Redemption Fund (GRF)

VII.18 As the fund manager of state governments, the Reserve Bank has been managing their consolidated sinking funds (CSF) and guarantee redemption funds (GRF). In addition to dated government securities, the Reserve Bank has started investing in SDLs and other high yielding securities (for example, treasury bills) as per the mandate given by the respective state governments. The outstanding investment in CSF and GRF stood at ₹703 billion at end-March 2015, a rise of 14.8 per cent over the previous year. In its endeavour to create awareness among Finance Department officials of state governments, capacity building programmes were organised by the Reserve Bank in a number of states including Tripura, Mizoram, Jharkhand, Odisha and Uttarakhand.

Agenda for 2015-16

VII.19 Union Budget, 2015-16 has projected a marginal increase in the Centre’s net market borrowings in 2015-16. With signs of improvement in macroeconomic conditions and moderation in inflationary pressures, the governments’ market borrowing programmes are likely to be completed in an orderly manner, while minimising the cost of borrowing.

VII.20 A medium term debt management strategy, in consultation with GoI, in line with best international practices will be placed in the public domain during 2015-16. In order to manage GoI’s maturity profile and also to reduce the rollover risk, it is planned that buybacks and switches will be part of the regular calendar of issuance from the second half of 2015-16. To cater to the demand from long term investors like insurance companies and pension funds, a 40-year security is proposed to be issued during 2015-16, taking in view a relatively flat yield curve.

Box VII.1
New Initiatives in Government Banking

Internationally, arrangements for the government banking business vary across countries. For instance, it is performed by the central banks in France and Russia while in the UK and Australia it is performed by commercial banks. The payment processing is centralised in France and Russia but decentralised in South Africa. Larger countries, such as the US, China and India have adopted a mixed approach, depending on the nature and type of transactions (Chart 1).

As part of its initiatives to improve efficiency in government banking services, the Reserve Bank constituted a Working Group to Bring in Uniformity and Standardisation in Procedures/Data Structure of e-Receipt/e-Transactions of State Governments. The group submitted its report in April 2014. Its recommendations focus on migrating to a broadly uniform model for receipts and payments for all the states and integration with e-Kuber, the core banking solution of the Reserve Bank. As discussed in the State Finance Secretaries Conference organised by the Reserve Bank in May 2015, it was decided to implement the recommendations of the report on a pan-India basis. Accordingly, a task force has been constituted for monitoring the implementation process. Till date, 15 states have started this process and are at various stages of implementation. Efforts are on to bring the remaining states on board.

E-receipt and e-payment functions have been developed in e-Kuber to provide enhanced operational efficiency and facilitate better fund management of governments.The e-receipts system envisages revenue collection through agency banks, flow of information to the Reserve Bank and final transfer of funds to the respective state government’s accounts. The system is designed for faster processing without giving rise to any reconciliation issues. The agency banks participating in the revenue collection of a state are required to prepare details of daily receipts in a standardised ISO 20022 format file and upload it on the e-Kuber portal which is used by banks for their interface with the Reserve Bank. After processing the files, e-scrolls with all relevant information are transmitted electronically to the state governments in a straight-through-processing (STP) manner. The interface of e-Kuber with the public finance management system (PFMS) of the Central Government has been scaled up to serve all central ministries for effecting inter-government transactions on a STP basis.

For e-payments, wherever a state has a centralised treasury system, integration of its IT system with e-Kuber will be done and the details of payments to be effected by the government will be directly received, processed and transmitted to the National Electronic Funds Transfer (NEFT) system for effecting payments, with no manual intervention. Transactionwise e-scrolls will be sent on the same day, duly indicating status of payments (whether successful, or returned). This will ensure that all payments are processed efficiently and beneficiaries receive the payments without delay

With a view to maximising benefits from technological developments, a Working Group on Business Process Reengineering with participation from government agencies, banks and the Reserve Bank has been set up. The group will examine the workflows, systems and processes for handling government business, related institutional infrastructure and reporting structures. The group is expected to submit its report by October 2015. With these initiatives, banking arrangements of the governments including their cash management are set to witness significant efficiencies in the years to come.

References:

Pessoa, M. and M. Williams (2012), ‘Government Cash Management: Relationship between the Treasury and the Central Government’, International Monetary Fund.

Pattanayak, S. and I. Fainboim (2011), ‘Treasury Single Account: An Essential Tool for Government Cash Management’, International Monetary Fund.

VII.21 Market borrowings of state governments have been budgeted higher for 2015-16 than the previous year. To improve predictability of market borrowings, all the states will be encouraged to move over to a quarterly calendar of issuances with effect from 2015-16 and the first of this calendar has been announced for the second quarter of 2015-16. The states have also been advised to actively engage with investors within their states to diversify the investor base.

VII.22 The report of the Advisory Committee on Ways and Means Advance to State Governments (Chairman: Sumit Bose) is expected to be finalised and will be taken up for implementation.

VII.23 The Reserve Bank will continue with the agenda of enabling easier and increased access to retail investors. As part of this, a web-based solution on the e-Kuber platform for participation of all mid-segment/retail investors having gilt accounts is being implemented. To develop a more liquid government securities market, a scheme of market making in select semi-liquid securities by PDs will be implemented. The non-competitive bidding facility available to retail investors is currently applicable only to auctions of dated securities. It is proposed to allow the non-competitive bidding facility in treasury bills to individuals as well. The Reserve Bank in consultation with all stakeholders will enable seamless movement of securities from the subsidiary general ledger (SGL) form to demat form and vice versa to promote trading of G-secs on stock exchanges. The Reserve Bank will work to put in place a more predictable framework on the size and scope of investments in G-secs by foreign portfolio in vestors taking into account the risks and benefits associated with such flows into the debt market.

VII.24 The Reserve Bank will closely work with the Government of India in the preparatory arrangements for the establishment of the Public Debt Management Agency (PDMA).