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Shaji Vikraman

EARLY this year, when Mr Yashwant Sinha unveiled the Union Budget, there was big talk of reforming the domestic debt market.

Mr Sinha had proposed trading of government securities through an order-driven, screen-based system on the stock exchange, an electronic Negotiated Dealing System (NDS) for electronic bidding in auctions for government securities and for dealings in government securities on a real time basis, a new Government Securities Act, and the setting up of the Real Time Gross Settlement Systems (RTGS).

With the countdown for the next Budget set to commence, a sense of urgency is now visible among those formulating policies in North Block. Last year, the job of working out the proposed reforms for the debt market was handled by Dr Rakesh Mohan during his stint as the Advisor to the Finance Minister. Having now moved to Mumbai, to the Reserve Bank of India as its Deputy Governor, he will again be on call for this assignment. North Block is planning to seek a concept paper of sorts from the banking sector regulator, to get the work going. For long, the multilateral agency, the ADB, has been trying to push for debt market reforms in the country as it reckons that widening the market is crucial, especially for raising funds for the infrastructure sector. In 2000, as part of this endeavour, it provided a Technical Assistance (TA) grant to the government for look at the prospect of undertaking reforms for the long-term development of the local debt market.

The ADB-sponsored report had made several recommendations, including reducing the role of the government in the determination of interest rates by establishing an independent public debt office function and reducing the role of the government as owner of financial institutions to permit a greater discovery of views in investment decisions.

The report went on to suggest an improvement in post-trade transparency in the secondary debt market to permit efficient price discovery and to encourage wider participation in the market besides recommending that the Government and the RBI permit short-selling of government securities. However, some of these recommendations may fall on deaf ears. North Block has made it clear that it has no intention of promoting an independent public debt office which is in existence in several countries.

That could be on the distant horizon, maybe after a decade or so, policy managers reckon. Who has the expertise on that except the RBI, they add, in an incredible volte face. For, till the other day, they were talking of how over a five-year horizon, an independent debt management office should be set up. Both the Government and the RBI have kicked off an exercise to encourage wider participation in the market. In auctions of government securities, 5 per cent of the amount is now reserved for retail investors and provident funds to bid on a non-competitive basis, though so far, the 5 per cent quota has never been exhausted. But the government is keen that it be kept going for a while.

Another proposal mooted by the securities arm of a financial institution to retail government securities through the network of post-offices is now stuck. The reason: Some babus are now quibbling over the commission which ought to be paid for the department for retailing.

These apart, policy managers reckon that there is no reason why reforms similar to that achieved in the Indian equity market over the last five-six years cannot be carried out in the debt market also. And that too when the debt market dwarfs the equity market. India's secondary debt market is noted for overwhelmingly dominant trades only in government securities and Treasury bills. That will also have to change.

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