In the recent past, important landmarks in the development of Government securities market were : operationalisation of Negotiated Dealing System and setting up of Clearing Corporation of India Ltd. The Negotiated Dealing System (NDS) (Phase I) has been operationalised on February 15, 2002. It provides on - line electronic bidding facility in primary auctions, daily LAF auctions, screen - based electronic dealing and reporting of transactions in money market instruments. It also facilitates secondary market transactions in Government securities and dissemination of information on trades with minimal time lag. In addition, the NDS enables "paperless" settlement of transactions in government securities. The system has electronic connectivity to CCIL and the Public Debt Office.

The Clearing Corporation of India Limited (CCIL) commenced its operations in clearing and settlement of transactions in Government securities (including repos) on February 15, 2002. Acting as a central counterparty, the CCIL provides guaranteed settlement and has in place risk management systems to limit settlement risk and operates a settlement guarantee fund backed by lines of credit from commercial banks. All repo transactions have to be necessarily put through the CCIL while all outright transactions up to Rs.20 crore have to be settled through CCIL.

There is a proposal to replace the existing Public Debt Act, 1944, by a new Government Securities Act. All the States, except Jammu and Kashmir, have given their concurrence for the proposal and the Bill is awaiting Parliamentary approval. The new Act will simplify the procedures for transactions in Government securities, allow for nomination, lien marking/ pledging of securities, transfer of ownership in electronic form, etc.

The amended Securities Contract (Regulation) Act, 1956 (SCRA) has conferred on RBI the responsibility of regulation of government securities, money market securities which include repos in all securities including corporate debt securities since March 1, 2000.

The Fiscal Responsibility and Budget Management Bill, 2000, seeks to place limit on revenue and fiscal deficit of the Government. The Bill has been examined by the Standing Committee on Finance and is at present before the Parliament.

The system of Primary Dealers was introduced in 1995. The PDs are expected to absorb government securities in primary markets, to provide two-way quotes in the secondary market and help develop the retail market. The capital adequacy requirements of PDs take into account both credit risk and market risk. They are required to maintain a minimum capital of 15 per cent of aggregate risk weighted assets, including market risk capital (arrived at using the Value at Risk method). ALM discipline has been extended to PDs. RBI is also vested with the responsibility of on-site supervision of PDs. PDs have now been brought under the purview of the Board for Financial Supervision. The satellite dealer system was introduced in 1996 to act as a second tier to the Primary Dealers in developing the market particularly the retail segment. The system which was in operation for more than six years was discontinued because it did not yield the desired results.

The short term liquidity management centered around the operations of Liquidity Adjustment Facility through repo/ reverse repo transactions. The repo operations by the RBI have not only helped in managing the liquidity in the system, but also facilitated the deepening of the government securities market and providing signal to the market through the repo rate. The Liquidity Adjustment Facility (LAF) has been introduced since June 2000. Operating through daily repo and reverse repo auctions, the LAF has been assigned three broad objectives, viz., (a) to meet primarily day to day liquidity mismatches in the system and not the funding requirements of the participants, (b) restricting volatility in short-term money market rates and, (c) steering the movements in these rates consistent with monetary policy objectives. Since November 2001, fortnightly repos were introduced for developing term money market. A fixed rate repo was also introduced on March 5, 2002 to signal the market and thereby stabilizing the interest rate.

Reserve Bank does not manage the contingent liabilities of either the Centre or the State Governments. It, however, has been playing an active but indirect role in sensitizing State Governments to the fiscal risk inherent in the guarantees issued by them, in view of the sharp increase in such guarantees in recent years. The Technical Committee on State Government Guarantees (February 1999), constituted to examine the issue recommended, inter alia, on proper management of guarantees including setting a ceiling on them, setting up of a Guarantee Redemption Fund and comprehensive disclosure of guarantees in state budgets. Contingent liabilities of seventeen major States amount to Rs. 1,68,712 crore (or 8.1 per cent of GDP) as at end of March 2001 as compared with Rs. 40,159 crore (or 6.1 per cent of GDP) at the end of March 1992. The Reserve Bank also issued guidelines to all the banks advising to examine the commercial viability of projects before providing loans to State Governments/ Institutions against guarantee. The guarantee should not be treated as a substitute for commercial viability.

At the initiative of the Reserve Bank, Consolidated Sinking Funds (CSFs) have been set up by certain State Governments for redemption of the loans. So far 11 State Governments have set up the Consolidated Sinking Fund.

The Report of the Technical Committee on State Government Guarantees (1999) recommended that each State should set up a contingency fund or make some provision for discharging the devolvement on guarantees provided by them. The guarantee fees collected should be credited to the fund set up for the purpose. Since the recommendations of the Committee, several States have taken steps to set up Guarantee Redemption Fund (GRF) and earmarked guarantee fees received towards the Fund. So far 5 States have set up the Guarantee Redemption Fund. Consultation Process

There is a Monitoring Group on Cash and Debt Management of Central Government which consist of officials of Government of India and the Reserve Bank. The group deliberates on important debt management issues.

The Reserve Bank has constituted the Technical Advisory Committee (TAC) on Money and Government Securities markets to advise, on an ongoing basis, on the development of a healthy and vibrant money and Government securities markets. The Committee, which includes important market participants, academicians and policy makers, has been crystallizing the views and suggestions across various fields of the financial market and acting as a facilitator for the Reserve Bank in steering reforms in money and Government securities markets.

The Reserve Bank organizes conference of State Finance Secretaries twice a year to discuss the issues and problems related to cash and debt management of the State Governments. These Conferences have emerged as a useful forum for interactions between the Finance Secretaries of the States and senior officials of the Ministry of Finance, Planning Commission and the Reserve Bank of India and helped the State Government address many issues concerning their finances viz., revisions in the Ways and Means Advances, guarantees extended by States, market borrowing programme, consolidated sinking fund (CSF), transparency in fiscal operations, Guarantee Redemption Fund, interest burden on States and finances of local bodies, accounting standard and information dissemination, fiscal reforms of the States, automatic debit mechanism etc.

To enable both institutional and retail investors to plan their investments better, an indicative calendar for issuance of dated securities during the first half of the current year has been announced. Statistical information relating to both primary and secondary market for Government securities is disseminated at regular interval to ensure transparency of debt management operations as well as of secondary market activity. This is done through either press releases or Bank's publications viz., (e.g., daily press release of all the transactions settled through SGL Accounts, RBI monthly Bulletin, Weekly Statistical Supplement, Handbook of Statistics on Indian Economy, Report on Currency and Finance and Annual Report) Outlook for Future Development of Debt management in India has clearly come a long way from a passive system to a market driven exercise with developed institutions, instruments and markets. In terms of international benchmarks, India ranks on par with some of the developed countries in areas like institutional framework, risk management set-up, market development, clearing and settlement procedures and transparency in debt management operations The artificially administered interest rate system of government securities market has developed into a market determined one and an inactive thin secondary market has grown into an actively traded and reasonably liquid market. Settlement systems have developed significantly and we are moving towards a system which will be comparable with the best systems internationally. Some of the major issues in respect of which further development is being contemplated are the following:

1. A working Group set up in 1997 had recommended separation of debt and monetary management. However, separation of the two functions would be dependent on the fulfilment of certain pre-conditions, viz., development of financial markets, reasonable control over fiscal deficit and necessary legislative changes. The feasibility and further steps for separation of government debt management from Reserve Bank is proposed to be taken up once legislative action with regard to Fiscal Responsibility Bill and amendments with regard to the Reserve Bank of India Act are accomplished.

2. Measures to widen the base of the repo market including extending it to non-SGL account holders like CSGL account holders. Introduction of longer term repo, rollover of repos, taxation and standardised accounting are the major areas to be focussed in the near future.

3. For the introduction of STRIPS in the government securities market, the modalities are being finalised. This can be done only after Government Securities Act is passed by Parliament. The Report of the Working Group set up in May 2002 for Suggesting Operational and Prudential Guidelines on STRIPS has been placed on the website of RBI in August 2002 for comments.

4. The issuance calendar for Government of India securities which was introduced for the first time in April 2002 for the first six months of the year and has been successfully completed, is to be finalised for the second half of the year. It is expected to be announced soon.

5. The implementation of the next phase of the PDO-NDS project involving integration with security settlement system and primary markets operations, automation and inter-connectivity of PDOs, electronic maintenance of record of ownership, etc. is under way.