Need to Widen and Deepen the Government Securities Market
The importance of the Government Securities markets can be evaluated from three angles as follows:
- From the Government's point of view, which is the borrower;
- From their contribution to the financial markets especially debt markets; and
- From the working of monetary policy.
From the Government's viewpoint, a well-developed, broad and deep Government Securities market is vital to make public borrowings at reasonable costs and to avoid the automatic monetization of Government deficit by the central bank. This is essential in the case of secondary markets if the Government's borrowing needs are significant. The benefits of an efficient and well-functioning government securities market are optimization of maturity and interest costs, minimum affect of huge Government borrowings on the market and smooth co-ordination between monetary and public debt policy.
The Government Securities are taken as benchmarks for pricing various financial instruments and hence have become essential contributors to the fixed income markets all over the world. They facilitate proper risk evaluation in various debt instruments and uniformity of interest rates in several other markets. They help to integrate different markets in the financial system of a country and provide better inter linkage between the domestic and foreign financial markets. Countries where no funding requirements for the government are required, have evolved other standards. In such countries non-government markets have resorted to price discovery. Some examples of benchmarks in such markets are interbank repo rates, collateralized obligations, interest rate swaps and top rated corporate bonds.
Finally, several countries are now using indirect instruments such as repos and open market operations instead of direct instruments. A well-developed government securities market enhances the implementation of the monetary policy. Repurchase agreements in many developing economies are conducted through Treasury Bills and Government Dated Securities. Apart from generating finances for the government the T-Bills market also stimulates the money market. Also the development of money market depends upon the central bank's terms for liquidity adjustment. The banks may not transact with each other if there is a certain liquidity adjustment support leading to obstructions in the progress of the money market.
The Government Securities market occupies the major part of the debt market and as already cited the rates in this market are benchmarks for the whole system. The RBI is the regulator of the monetary system, Government securities market, manager of Government borrowings, and regulator of money markets and forex markets. Hence from the view point of regulation the development of the Government Securities market is in RBI's jurisdiction, whereas the regulation of the whole debt market in the context of public issues by corporates and trading in stock exchanges is regulated by the SEBI. Accordingly, RBI has initiated a number of measures for the development of the primary and secondary markets for Government Securities.