Chapter 16: Internal Debt Management

Background
Sovereign debt management is the process of establishing and executing a strategy for
managing the government’s debt in order to raise the required amount of funding, achieve
its risk and cost objectives, and meet any other sovereign debt management goals the
government may have set, such as developing a liquid and well-functioning domestic
government securities market. As a debt manager, the Reserve Bank of India issues
Government securities and manages government debt on behalf of the Governments,
based on the statutory provisions in the case of the Central Government and as per the
agreement with the State Governments and Union Territories. As part of the cash
management function, the Bank provides Ways and Means Advances (WMA) to the
Governments to meet temporary mismatches in their receipts and payments. The Bank also
undertakes investment of surplus cash balances of the Governments. Management of public
debt on behalf of the Central and the State Governments involves the issuance of
Government Securities, payment of interest, repayment of securities, and other operational
matters such as debt certificates and their registration. The public debt management
function is carried out by the Internal Debt Management Department (IDMD) at the Central
Office and the Public Debt Office (PDO) at the Offices of the Bank.

Statutory Basis
Article 292 of the Constitution provides for debt issuance by the Government of India (GOI)
on the security of the Consolidated Fund of India. In terms of Section 20 and 21 of the RBI
Act, it is incumbent upon the Central Government to entrust the Reserve Bank of India with
its debt and cash management functions, and it is the responsibility of the Reserve Bank of
India to conduct the debt and cash management functions of Government of India. The
matters related to the issue and servicing of Government debt are dealt as per the
provisions of the Government Securities Act (GS Act) 2006 and the Government Securities
Regulation 2007 framed thereunder.

Article 293 of the Constitution of India provides the financial borrowing powers to State
Governments. It allows States to borrow within India upon the security of their Consolidated
Funds, subject to limits set by their respective legislatures. Additionally, it requires States
with outstanding loans from the Central Government to seek its consent for further
borrowing. State Governments can enter into an agreement with RBI in terms of Section
21A of the RBI Act for their banking and debt management functions. As on date, all State
Governments, along with the Union Territories of Puducherry and Jammu and Kashmir,
have signed agreements with the RBI to manage their debt activities. With regard to banking
agreement, barring Sikkim, RBI has banking agreements with all the State Governments
and UT of Puducherry and Jammu and Kashmir.

Medium Term Debt Management Strategy (MTDS)

Over the years, government debt management has been guided by the three pillars of the
Medium-Term Debt Management Strategy (MTDS), viz. cost optimisation, risk mitigation
and market development. The MTDS aims to secure market borrowings in a cost-effective
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way over the medium to long term while maintaining risks at prudent levels to ensure a
stable debt structure and develop a liquid and well-functioning domestic government
securities market. The IDMD undertakes public debt management within the MTDS
framework, factoring in domestic and global financial market developments. To improve the
stability of the government debt portfolio, consolidation of the outstanding debt is carried
out through both passive and active methods. Passive consolidation is primarily achieved
through re-issuances, accounting for nearly 95 percent of bond issuances, while active
consolidation is done through switches and buy-backs.

Monitoring Group on Cash and Debt Management (MCGDM)

The Monitoring Group on Cash and Debt Management (MCGDM), a standing committee
co-chaired by the Secretary, Department of Economic Affairs, Ministry of Finance, GOI, and
the Deputy Governor in-Charge of IDMD, RBI, meets periodically and decides on various
policies and plans relating to management of the government’s market borrowing program
including formulation of the half-yearly borrowing calendar. This arrangement is further
complemented by regular discussions between the Ministry of Finance and the Reserve
Bank of India.

Role of RBI as Debt Manager

IDMD manages the Market Borrowing Programme (MBP) of the Centre as well as States
and Union Territories (UTs) and maintains the accounting/ reporting related to these
operations. This involves issue and servicing aspects, i.e., retirement of rupee loans,
interest payment on loans and handling operational issues concerning debt certificates and
their registration. Taking into consideration the assessment of market demand, GOI’s
budgetary and cash management needs, funding gap and market development,
considerations, a calendar of weekly auctions is prepared. Issuance of the calendar of
weekly auctions at half-yearly intervals enables institutional and retail investors to plan their
investments efficiently leading to improved transparency of the issuance process and
increased stability of the Government Securities Market. In the case of issue of Treasury
Bills(T-bills) and State Government securities, indicative borrowing calendar is issued on
quarterly and half-yearly basis, respectively. Weekly auctions are conducted for issuance
of dated securities of State Governments (Tuesday), Treasury Bills (Wednesday) and dated
securities of Central Government (Friday) with settlement on T+1 basis.

Instruments of Market Borrowing

RBI manages market borrowing on behalf of the government by issuing marketable
securities in various forms, tailored to meet market demand. These borrowing instruments
are categorized as follows:
• Fixed rate bonds - They are debt securities that pay a fixed interest rate over their entire
term. This interest, known as the coupon, is paid periodically, typically semi-annually or
annually. At maturity, the bondholder receives the principal amount, providing a
predictable income stream and reducing interest rate risk for investors. The typical
nomenclature of a fixed rate bond would be, for instance 7.10% GS 2034 (a 10-year
Government of India dated security bearing coupon of 7.10% with maturity in the year
2034).

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• Floating Rate Bonds (FRBs) - These bonds pay coupons based on some benchmark
rate (generally linked to the yield of 182- treasury bills) and the coupon is reset at periodic
intervals.
• Zero Coupon bonds (Treasury Bills, Cash Management Bills) - Zero coupon bonds pay
no periodic coupon, are issued at a discount and redeemed at full face value. The
difference in discounted issue price and face value represents the return on these
bonds. Treasury bills and cash management bills issued by the Government of India are
money market instruments of such type.
• Sovereign Gold bonds (SGB) - These are government-issued securities denominated
in grams of gold, providing an alternative to physical gold investment. They offer periodic
interest payments and the redemption value is linked to the prevailing market price of
gold at maturity. SGBs provide a secure way to invest in gold while earning interest,
without the concerns of storage and purity.
• Floating Rate Savings bond, (2020) Taxable- FRSB 2020 (T) - These are interest
bearing, non-tradeable bonds which are repayable on expiry of seven years from the
date of issue. The coupon/interest rate is not fixed and is linked/pegged with the
prevailing National Saving (NSC) rate with a spread of (+)35 bps over the NSC rate. The
coupon would be reset on half-yearly basis, on July 01 and January 01 every year.
• Inflation Indexed Bonds (Retail & Wholesale) - Such bonds provide protection from
erosion of real returns due to inflation, wherein inflation is measured through inflation
index such as the Consumer Price Index (CPI) and Wholesale Price index (WPI). These
bonds are issued occasionally.
• Bonds with call/put Options - Bonds with call & put option provide additional flexibility
to the Issuer and the Investor respectively to better manage the interest rate risk.
Government of India issues such bonds very rarely.
• Special Securities - Special securities, such as, Oil bonds, fertilizer bonds, UDAY Re-
capitalisation Bonds, etc., were issued by Government of India to specific entities for
specific purposes. For example, power bonds (or UDAY Bonds) are issued as a result of
restructuring of loans of Discoms through partial takeover of the liability by the States.
Similarly, Oil Bonds & Fertilizer bonds were issued in lieu of subsidy payments by GoI
to public sector oil marketing companies & fertilizer companies.
• Sovereign green bonds (SGrBs) - These are debt instruments issued by Government
of India to mobilise resources for green infrastructure. The proceeds from these bonds
are deployed in public sector projects which help in reducing the carbon intensity of the
economy.

Primary Dealers
In 1995, the Reserve Bank of India introduced the system of Primary Dealers (PDs) in the
Government Securities Market. The objectives of the PD system are to strengthen the
infrastructure in G-Sec market, develop underwriting and market making capabilities for G-
Sec, improve secondary market trading system and to make PDs an effective conduit for
open market operations. As on September 01, 2024, there are seven standalone PDs
(standalone PDs are required to registered as NBFCs under Section 45 IA of the RBI Act,
1934) and fourteen bank PDs which undertake Primary Dealership activities
departmentally.
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PDs are expected to play an active role in the G-Sec market, both in primary and secondary
market segments, through fulfillment of various obligations like underwriting the Central
Government Primary auction, predominance of investment in G-Secs, market making in G-
Secs, achieving minimum secondary market turnover ratio and providing quotes to retail
investors on RBI Retail Direct portal. An illustration of the Underwriting auction process is
given in Chart1.

Chart 1: Illustration of Underwriting Auction process

Investors in Government Securities

Commercial banks in India are the largest investor class in Government securities, followed
by Insurance Companies, Provident Funds, Pension Funds, and Mutual Funds. RBI has
been pursuing the policy of
opening the G-Sec market to
foreign portfolio investors
(FPIs) in a gradual and
calibrated manner with an
objective to broaden the investor
base of government securities
while mitigating the risks
associated with potential
volatility in the FPI investment
flows. FPIs have also been
allowed to trade in various
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interest rate derivative products in India for the purpose of hedging or otherwise.

Role of RBI as Cash Manager to the Governments

The Reserve Bank handles the cash management operations of the Government of India,
ensuring that the government has sufficient liquidity to meet its daily expenditures while
maintaining overall fiscal discipline. RBI also manages cash operations of State
Governments. As on July 01, 2024, for cash management and systemic liquidity
management purposes, daily variations in Governments’ cash balances are monitored and
projections are made taking into account the historical trends in such variations and
prevailing fiscal scenarios. The temporary mismatches between the Government’s revenue
and expenditure are managed through Bank’s Ways and Means Advance (WMA) and
Overdraft facilities. In case of surplus cash balance, the amount is invested in Bank’s
variable rate repo (VRR) and/or fixed rate reverse repo (FRRR) in case of Central
Government and in 14-day Intermediate Treasury Bills (non-auctioned discounted
instrument at reverse repo rate -2%) in case of State Governments.

Ways and Means Advances (WMA)

To tide over temporary mismatches in the receipts and payments of Governments,
Section17 (5) of the RBI Act empowers RBI to grant Ways and Means Advances to Central
Government and State Governments, which is in the nature of uncollaterised advance. WMA
is granted as and when required by the Governments (Central/State).
• WMA for Central Government - The WMA limit is fixed by RBI, separately for each half
year, in consultation with the Central Government. If the Government borrows over and
above this limit, it amounts to Overdraft (OD). The Reserve Bank may trigger fresh
floatation of market loans when the Government utilises 75 per cent of the WMA limit.
The Bank retains the flexibility to revise the limit at any time, in consultation with the
Government, taking into consideration the prevailing circumstances. Interest is charged
at repo rate for three months and when the WMA limit is crossed, the Central
government enters into an overdraft (OD) which has to be cleared within 10 consecutive
working days. The interest rate on OD is currently the repo rate plus 2%.
• WMA for State Governments - The limit of WMA varies from State to State and it was
last revised on June 28, 2024 based on the recommendations of the Group constituted
by the Reserve Bank and consisting of select State Finance Secretaries. In addition to
WMA, State Governments are also eligible for a Special Drawing Facility (SDF), which
is granted against collateral of Government Securities held by State Governments. SDF
can be availed against the investment in Consolidated Sinking Funds (CSF)/ Guarantee
Redemption Funds (GRF) at repo rate-2% and against Auction Treasury Bills (ATBs) at
repo rate -1%. As SDF is a collateralised advance, the interest rate for SDF is less than
that of WMA. State Governments have to exhaust the SDF limit before availing WMA.
In case of WMA, interest charged will be on repo rate for a period of maximum three
months, plus one per cent in case of more than three months. When the advances to
the State Governments exceed their SDF and WMA limits, overdraft (OD) facility is
triggered. State Governments can be in OD for a maximum of 14 consecutive working
days and 36 days in a quarter.
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Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF)
State Governments maintain the Consolidated Sinking Fund (CSF) and the Guarantee
Redemption Funds (GRF) with the Reserve Bank as buffers for repayment of their liabilities.
These reserves are intended to provide a cushion to the State Governments in meeting the
future repayment obligations. Consolidated Sinking Fund is maintained by states for
amortisation of all loan including loans from banks, liabilities on account of NSSF, etc.
“Guarantees” are contingent liabilities that may have to be invoked if an event covered by
the guarantee occurs. Since guarantees result in increase in contingent liability, State
Governments maintains a Guarantee Redemption Fund for redemption of guarantees
whenever such guarantees are invoked. These two funds are maintained by RBI.
Investment in CSF and GRF with RBI, is voluntary at present.
Apart from these two funds, on a request received from the Government of Odisha, a
Budget Stabilisation Fund has been established which would cater to the needs of the State
in mitigating the risk of revenue shocks on the State budget. The fund aims at reducing the
impact of volatile revenue on the State’s economy.

RBI Retail Direct Scheme

The RBI Retail Direct scheme was launched on November 12, 2021 with the objective to
further ease the access of retail investors to the government securities market by allowing
retail investors to directly participate in primary and secondary government securities
market. This initiative enables individual investors to open their Retail Direct Gilt (RDG)
account with RBI at its Retail Direct Platform and to buy and sell government securities
through the RBI's Retail Direct platform, bypassing the involvement of intermediaries. It
offers transparency, easy accessibility to retail investors to invest in government securities,
including investment in Sovereign Gold Bond, floating rate savings bond (FRSB), and gives
the retail investors flexibility to manage their investments. The scheme supports the RBI's
broader goal of broadening the investor base of the government securities market. RBI
Retail Direct can be accessed through the portal (https://rbiretaildirect.org.in) or through the
mobile application. The mobile app can be downloaded from the Play Store for Android
users and App Store for iOS users. To provide liquidity in the secondary market for retail
investors, the Primary Dealers were required to present on the Negotiated Dealing System
– Order Matching (NDS-OM) platform (odd-lot and request for quotes segment) throughout
market hours and respond to buy/sell requests from RDG account holders.

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