Page 62 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Unit 4: Indian Capital Market

As a manager of the public debt, the RBI manages the issue including notification of the Notes
issues, opening and closing of the issues, appointment of participants to the issue,
determination of the maximum rate of yield or the minimum offer price, as the case may
be.
The RBI acts as an underwriter for central government securities and manages the
government debt by holding a large chunk of central government debt. It conducts open
market operations to stabilize the market and help the institutions, banks, etc., operating
in the market.
It also acts as custodian of the government securities. The matter of servicing of loans
registered in its office is the responsibility of the PDO of the RBI.
As a manager of public debt, the RBI is always keen to have a well-developed government
securities market as it provides flexibility to exercise various options for optimizing
maturity as well as interest cost to the government. It also helps in minimizing the market
impact of large or lumpy government debt operations and ensuring better coordination
between monetary policy and debt management policy.
In the management of the market, the RBI besides traditional tools adopts a blend of non-
traditional tools, like auctions of securities of various maturities, funding of Treasury
bills and Zero Coupon bonds, to reduce the cost and improve the operational efficiency.
The Repo technique as an instrument of operations is employed to regulate liquidity and
facilitate trade in government securities with least fluctuations in yield. The system of
fixed coupon rates is still in vogue for state government securities.

Role of Government Securities Market

The g-securities market plays crucial role in overall economic development of a country. A
country's g-securities market enables the managers of public debt to raise resources from the
market in a cost effective manner with due recognition to associated risks. It also helps in
effective operation of monetary policy through application of indirect instruments such as open
market operations, for which government securities act as collateral. The g securities market is
also regarded as the backbone of fixed income securities markets as it provides the benchmark
yield and imparts liquidity to other financial markets. The existence of an efficient g-securities
market is seen as an essential precursor, in particular, for development of the corporate debt
market. Furthermore, the g-securities market acts as a channel for integration of various segments
of the domestic financial markets and helps in establishing inter-linkages between the domestic
and external financial markets.
The g-securities market constitutes a key segment of the financial market, offering virtually
credit risk-free highly liquid financial instruments which market players are more willing to
transact and take positions. The willingness of market participants to transact in government
securities, in turn, imparts liquidity to these instruments, which benefit all segments of the
financial market. Consequently, g-securities are employed by dealers on a major hedging tool
for interest rate risk and as underlying assets and collateral for related markets, such as repo,
futures and options.
Activity in the g-securities market can affect overall investments in the economy by enabling
the development of private bond market in two ways: (i) by putting in place a basic financial
infrastructure, including laws, institutions, products, services, repo and derivative markets, and
(ii) by playing a role as an informational benchmark.
The development of the g-securities market is essential for establishing the risk-free benchmark
in financial markets and ensuring their functioning in an efficient manner. This market, which
is often the predominant segment of the overall debt market, plays a key role in the monetary

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