Informist, Thursday, Aug 17, 2023

NEW DELHI – The rise in absorption of government bond supply since the COVID-19 pandemic by non-bank investors has lowered the sovereign cost of borrowing in India, according to a paper by Reserve Bank of India staff.

The paper, titled 'Shifting Tides: Growing Influence of Non-Bank Investors in G-Sec Market in India', was published in the RBI Bulletin for August, released today. The paper attributed its views to a host of central bank officials and said it does not necessarily reflect the views of the RBI.

A rise in government debt supply by 1% will increase the cost of financing, or gilt yields, by 9.5-10 basis points, according to the paper. If banks were the sole market buyers, gilt yields would rise, on average, 8.1% more than if non-banks were the only buyers.

The government's issuance of dated securities, on a gross basis, rose to 14.21 trln rupees in 2022-23 (Apr-Mar) from 7.1 trln rupees in 2019-20, before the onset of the coronavirus pandemic.

"Scenario analysis indicates shallower increase in borrowing costs when non-banks absorb all new government debt compared to when it is absorbed entirely by banks, highlighting that RBI's continued efforts to diversify the investor pool for G-Secs are well calibrated," the paper said.

Banks mopped up 38.9%, while non-banks absorbed 54.2% of every unit of fresh debt supplied between the onset of the COVID-19 pandemic and December 2022. The share of the RBI's gilt buys was not statistically significant, at 6.9%, despite measures by the central bank to keep gilt yields in check, the paper said.

"These findings highlight that the central bank is not systematically increasing debt holdings but only participates in the G-Sec market on discretion and as a matter of policy choice," the paper said.

Non-bank investors are more sensitive to movement in gilt yields than banks, which have historically been the largest holders of the central government's debt stock, the paper said. Non-banks surpassed banks as the largest holders of India's sovereign debt around March 2019, the paper said. 

The sensitivity of non-banks to rising yields is about 5-10% greater than banking institutions.

The increased sensitivity could be caused by the fact that non-bank holdings of gilts are all marked to market, while banks can choose to park their government bond holdings in the held-to-maturity portfolio, which is not subject to mark-to-market valuation, the paper said.

The demand for long-term sovereign bonds declines both in times of high inflation and higher real GDP growth, with investor interest possibly shifting to risk assets such as equities, the paper said. 

Commercial banks hold 36% of the outstanding debt stock, followed by insurance companies at 26% and the RBI at 15%, according to data from the central bank at the end of December. 'Others', which includes state government and pension funds, took up 9% of gilts.

Among other investors, provident funds own 5% of all outstanding gilts, while mutual funds have a mere 3% of the market. Foreign portfolio investors have shown a sharp pace of growth, but their holding of gilts is a mere 1%, about half that of corporate houses at 2%. Meanwhile, non-bank primary dealers only make up 0.4% of the market.

Market participants have increased their gilt holdings by 3.1% every quarter, compounded between March 2009 and December 2022, according to the study. Foreign portfolio investors have been the biggest gainers, at 6.4% every quarter, closely followed by mutual funds, at 5.5% quarterly. Corporate bond holdings have been the slowest to grow in this period, only about one-third of the average. End

Reported by Aaryan Khanna

Edited by Ashish Shirke

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