Page 63 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes policy transmission mechanism. Thus, regardless of whether the central bank acts as manager of
public debt or not, there are three major channels through which government debt structure
might influence monetary conditions, viz., and quantity of debt, composition of debt and
ownership of debt.

Self Assessment

Fill in the blanks:
6. Government securities market deals with tradable ……………..instruments issued by the
government for meeting its financing requirements.
7. The primary objective of the ………………………..market in various countries has been to
reduce the cost of government borrowings.
8. A ……………………..is that kind of government bond that certifies that the bearer is
entitled to specified sum stipulated in rupees on the date indicated in accordance with the
terms of a particular loan to which the bond relates.
9. As a banker to the government, the …………….tenders advise on the matters relating to
the amount of issues to be floated, timing and terms of new issues.
10. The development of the g-securities market is essential for establishing the
……………….benchmark in financial markets and ensuring their functioning in an efficient
manner.

Primary Government Securities Market

The primary market is that part of the capital markets that deals with the issue of new securities.
Companies, governments or public sector institutions can obtain funding through the sale of a
new stock or bond issue. This is typically done through a syndicate of securities dealers. The
process of selling new issues to investors is called underwriting. In the case of a new stock issue,
this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price
of the security offering.

Measures relating to Primary Market

1. The Reserve Bank introduced in June 1992, the auction system for issuance of central
government securities at market determined rates. Since the inception of the auction
system, multiple price auction system was used for dated securities. The uniform price
auction, followed for the issuance of 91-day Treasury Bills from November, 1998, was
extended to auctions of central government dated securities on a selective basis from 2001.

2. Apart from allotment through auction, a system of non-competitive bidding was introduced
in January 2002 to encourage retail investors who do not have sufficient expertise in such
bidding. The scheme provides for allocation up to 5 percent of the notified amount in the
specified auctions of dated securities.
The investor is permitted to make only a single bid for auction and the size of the bid can
vary from a minimum of ` 10,000 to ` 2 crores.
3. As the captive investor base was viewed as constraining the development of the market,
the statutory prescription for banks' investments in government and other approved
securities were scaled down from the peak level of 38.5 percent of NDTL in February, 1992
to the statutory minimum level of 25 percent by April, 1997. Apart from mandatory
investments, banks and other financial institutions may also hold government securities
as part of their trading portfolio.

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