Impact of followings on Indian Government Securities Market Budgetary Deficit FRBM Act Monetary Policy

1. Government SECURITIES
CA. Naman Khanna
Impact Assessment

2. GOVERNMENT
SECURITIES
MONETARY POLICY
FRBM ACT
BUDGETARY DEFICIT

3. GOVERNMENT
SECURITIES
Government SECURITIES
• Government’s debt obligation
• No default risk
• Fully tradable
• Generally eligible for SLR
What
• T-Bills
• CMB – for temporary mismatches
• Dated Securities – Qualifies for SLR
• SDL – Qualifies for SLR
Types

4. BUDGETARY DEFICIT
Government SECURITIES
• Revenue Deficit
(Revenue Exp. – Revenue Receipts)
• Capital Deficit
(Capital Exp. – Capital Receipts)
• Fiscal Deficit
(Tot. Exp. – (Rev. + Non Debt Cap.
Receipts))
• Primary Deficit
(Fiscal Deficit – Interest Payments)
Measures
• Revenue Deficit
Uses savings to finance
consumption expenditure
• Capital Deficit
Considers receipt from T-Bill Sale
Impact

5. FRBM ACT
Government SECURITIES
• Fiscal Responsibility and Budget
Management Act, 2003
• For fiscal discipline
• Phased reduction of deficit
• Binds Finance Minister
What
• Contain Fiscal & ‘Revenue deficit’*
• Fiscal operation transparency
• Long term macro economic stability
• Effective conduct of monetary
policy
Objectives
* Amended to ‘Effective Revenue Deficit’ in 2012 (RD Less Grants)

6. FRBM ACT
Government SECURITIES
• Sec. 5(2) – RBI may lend for short
term fiscal shortages
• Sec. 5(3) – RBI may not scribe to
primary issues of G-Sec (with
exceptions)
• Sec. 5(4) – RBI may not
sell/purchase G-Sec in secondary
market (with exceptions)
Act
• Govt. to borrow for Short term
fiscal shortages
• RBI prohibited to trade G-Sec in
primary market*
• RBI prohibited to trade G-Sec in
Secondary market*
Impact
* With exceptions

7. MONETARY POLICY
Government SECURITIES
RBI’s Process to:
• Control the supply of money
• Achieve high economic growth
• Optimize interest rates
What
• Establish price stability
• Controlled expansion of credit
• Promotion of Fixed Investment
• Efficient financial system
Objectives

8. MONETARY POLICY
Government SECURITIES
• Open Market Operations (OMO)
• Cash Reserve Ratio – 4%
• Statutory Liquidity Ratio – 21.5%
• Repo Rate-Reverse Repo Rate
(6.75% / 7.75%)
How
• Sale/Purchase of G-Sec
• Higher the CRR – lower the liquidity
• Liquid asset with Banks thru SLR
• Borrowing/Lending for RBI rate for
banks against G-Sec
Impact

9. MONETARY POLICY
Government SECURITIES
• FPI limit for G-Sec
• FPI limit for SDL
• Stance in response to Inflation
• Yield in G-Sec
Policy Impact
• Increase of FPI limit (G-Sec) – 5%
• Increase of FPI limit (SDL) – 2%
• Inter bank repo for G-Sec
Impact to come

10. Thank You…Government SECURITIES