Diversification of government bond holding has helped govt lower borrowing costs: Study

2023-08-18 19:37:43

MUMBAI: A strategy of lowering dominance of banks in the government securities (g-secs) banks by diversification and encouraging non bank participants such as insurance companies, pension and provident funds helped in lowering borrowing costs for the government a study by the Reserve Bank economists shows

“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” said a research paper by Reserve Bank economists Amit Pawar, Mayank Gupta, Abhinandan Borad, Subrat Kumar Seet and Deba Prasad Rath published in the central bank’s latest monthly bulletin. The authors are from the Department of Economic and Policy Research. The views expressed in this article are those of the authors and do not represent the views of the Reserve Bank of India.

The study reveals that nonbanks are more responsive to changes in G-Sec yields than banks. Overall, a one per cent increase in G-Sec supply is found to be associated with a 9.5 to 10 basis points increase in long term yields. Non-bank entities absorbed a significant portion of newly issued sovereign debt during the Covid-19 pandemic. Nonetheless, banks still dominate the ownership of g-secs in India.

Major holders of Government securities at the end of December’ 2022 include scheduled commercial banks (Rs 33.9 lakh crore), insurance companies (Rs 24.5 lakh crore), Reserve Bank of India ( Rs 13.8 lakh crore), provident funds ( Rs 4.4 lakh crore), pension funds (Rs 3.7 lakh crore), mutual funds (Rs 2.7 lakh crore), among others.

“The findings suggest that as yields rise, the demand for debt rises among both banks and nonbanks. However, non-banks exhibit slightly greater sensitivity to yield changes compared to banks” the study said.

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The study finds that as compared to banks, nonbank investors are more sensitive to changes in G-Sec yields – for a 1 percentage point increase in yields, domestic banks increase their debt holdings by 9.8 to 10.2 per cent, while non-banks exhibit a higher response, increasing their holdings by 10.8 to 11.1 per cent.These findings highlight that the Reserve Bank’s sustained measures aimed at diversifying the investor pool for G-Secs are well calibrated and aligned with debt management objectives of cost optimisation, risk mitigation and market development according to the authors of the study.

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