11.1 Debt management in 2002-03 continued to be directed at minimising cost, keeping in view the rollover risk, within the overall objectives of monetary policy. The borrowing programmes of the Central and State Governments were completed successfully with gross market borrowings of Rs.1,81,979 crore. The Central Government mobilised market borrowings to the tune of Rs.1,51,126 crore (net Rs.1,04,118 crore) during 2002-03 as against Rs. 1,33,801 crore (net Rs.92,302 crore) in the preceding year. The gross and net borrowings through dated securities amounted to Rs.1,25,000 crore and Rs.97,580 crore, respectively while Rs.26,126 crore (gross) and Rs.6,538 crore (net) were raised through 364-day Treasury Bills. The gross and net market borrowings of the State Governments amounted to Rs.30,853 crore and Rs.29,064 crore in 2002-03 as compared with Rs.18,707 crore and Rs.17,261 crore in the preceding year, respectively. Comfortable liquidity conditions due to increased capital flows, absence of pressures on account of credit off-take, and reductions in CRR combined with appropriate private placements, facilitated the smooth completion of a large market borrowing programme. The weighted average cost of borrowings declined significantly during the year, benefiting from falling yields due to easy liquidity conditions and low inflation.

11.2 The Reserve Bank continued to combine private placements with open market operations to meet the twin objectives of managing liquidity in the system and containing volatility in the secondary market. New initiatives in debt management included pre-payment of external debt against issue of domestic debt, a debt-swap scheme for the State Governments and a debt buy-back scheme which involved buying back of high cost and illiquid securities issued in the past in exchange of new securities at the prevailing market yield. Comprehensive restructuring of the scheme of Ways and Means Advances (WMA) and overdraft (OD) for States was also undertaken during 2002-03.

11.3 The Ways and Means Advance (WMA) limits of the Centre were maintained at Rs.10,000 crore for the first half (April-September) and Rs.6,000 crore for the second half (October-March) of 2002-03. The daily average utilisation of WMA and overdraft (OD) was, however, significantly lower (Table 11.1). From the middle of December 2002 to March 31, 2003, the Government of India consistently maintained a surplus balance with the Reserve Bank mainly due to increased Treasury Bill issuance, repayments by States under the debt swap scheme, and higher inflow through Relief Bonds. The daily average surplus balance during the period mid-December 2002–March 2003 was Rs.11,117 crore and ranged from Rs.982 crore to Rs.24,508 crore. The surpluses were invested in dated securities transferred from the Reserve Bank's investment account.

11.4 Currently, the Reserve Bank issues only 91-day (weekly, on Wednesdays) and 364-day Treasury Bills (fortnightly, on the Wednesday preceding the reporting Friday). The day of payment of both the Treasury Bills has been adjusted so as to synchronise them and to provide continuity in the maturity profile with adequate fungible stock. To make the Treasury Bill market vibrant and to provide an additional avenue of investment to the non-bank entities, the notified amount of the 364-day Treasury Bills was increased to Rs.1,000 crore with effect from April 3, 2002. The notified amount for auction of 91-day Treasury Bills was enhanced temporarily from Rs.250 crore to Rs.1,000 crore from December 11, 2002 to January 29, 2003 to absorb excess liquidity. As liquidity tightened in January 2003, the notified amount was reduced to Rs.500 crore for the rest of the financial year. The acceptance in the auction of 91-day Treasury Bills was less than the notified amount on two occasions (February 26, and March 12, 2003) due to substantially higher yield expectations of the market.

11.5 The gross amounts raised through 91-day and 364-day Treasury Bills were higher during 2002-03 (Appendix Table V.8). There was no devolvement on the Reserve Bank in any auction of the Treasury Bills during 2002-03 (Table 11.2).

11.6 With effect from December 11, 2002, the auction format of 91-day Treasury Bills was changed to the multiple price auction method from uniform price auction to encourage more responsible bidding from the market participants. There was a general decline in yields at auctions of both 91-day and 364-day Treasury Bills during the year (Chart XI.1). During May 2002 and in the last quarter of 2002-03, the rates firmed up because of tight liquidity conditions. During November 2002 to January 2003, on the other hand, a surfeit of liquidity pushed the yields on 91-day and 364-day Treasury Bills below the repo rate. Temporary tightness in the overnight rates had led to an inversion in the short-term yield curve with cut-off yield in 91-day Treasury Bill being higher than the cut-off for 364-day Treasury Bill on February 5, 2003. This was corrected in the subsequent auction on February 19, 2003.

11.7 Comfortable liquidity conditions were reflected in the enthusiastic market response in each of the Treasury Bill auctions (Table 11.3).

11.8 During the current year so far (up to August 6, 2003) the primary yield of 91-day and 364-day Treasury Bills declined by 97 and 94 basis points, respectively, from their March-end levels. Since April 23, 2003, the primary yields of both 91-day and 364-day Treasury Bills fell below the repo rate, mainly due to abundant liquidity. The notified amount of 91-day Treasury Bills was enhanced from Rs. 500 crore to Rs. 1,500 crore for eight auctions from August 6, 2003 to September 24, 2003 keeping in view the prevailing liquidity conditions in the system.

11.9 The Central Government raised a gross amount of Rs.1,25,000 crore and a net amount of Rs.97,580 crore during 2002-03 through issuance of dated securities (Appendix Table V.7). The gross and net market borrowings increased by 9 per cent and 11 per cent, respectively, over the preceding year. The ratio of net market borrowing through dated securities to the gross fiscal deficit moved up to 67.1 per cent in 2002-03 from 62.2 per cent in 2001-02.

11.10 Out of 31 issues of dated securities during the year, 12 were new issues while 19 were reissues, in line with the policy of passive consolidation of domestic debt. Out of 117 outstanding marketable dated securities of Rs.6,73,905 crore, 29 securities with minimum outstanding amount of Rs.10,000 crore or more now account for 54 per cent of the total outstanding amount.

11.11 Of the total market borrowing programme, Rs.94,000 crore was raised through auction of dated securities (25 auctions) and the balance of Rs.31,000 crore (six issues) through private placements with the Reserve Bank - Rs.6,000 crore (one issue) in April 2002 to meet large unanticipated requirements of the Central Government, Rs.12,000 crore (three issues) in May 2002 when the market experienced tight liquidity conditions and uncertainty due to border tensions and Rs.13,000 crore (two issues) for prepayment of external debt in February, 2003. There were devolvements of Rs.5,175 crore during the year. Net open market sales amounting to Rs.53,780 crore during the year more than offset the monetary impact of private placements and devolvements.

11.12 The issuance of half yearly indicative calendars for the core component of the Government of India's market borrowing programme was introduced in 2002-03 to provide transparency and thereby enable the market participants to improve their investment planning. The issuance calendar was mostly adhered to.

11.13 The response at primary auctions was generally positive, with average bid cover ratio of 2.0, except on two occasions - in May and June, 2002 - when the amounts under auction devolved partly on Primary Dealers (PDs) and the Reserve Bank (Box XI.1).

11.14 To reduce the bidding risk of market participants, the Reserve Bank used uniform auction format on an experimental basis, mainly for new types of instruments like Floating Rate Bonds (FRBs), bonds with option features and very long tenor bonds of 30 years maturity. The method was also used for fixed coupon securities in April 2002, but huge liquidity and aggressive bidding resulted in the cut-off yield being well below the prevailing market yields.

11.15 The policy of elongation of maturity of government securities was persevered with. The maximum maturity of securities issued was extended to 30 years in 2002-03 as compared with 25 years in 2001-02. There was a marginal fall in the weighted average maturity of securities issued during the year. This occurred mainly because of the issuance of securities for prepayment of foreign debt on maturity matched basis for an average tenor of 9.3 years. The weighted average maturity of the outstanding loans, however, went up as the share of securities under 5 years declined. On the other hand, the share of securities with maturity over 10 years increased from 18 per cent on March 31, 1998 to 39 per cent at the end of March 2003. The weighted average cost of dated securities issued during 2002-03 declined by 210 basis points to 7.34 per cent, reflecting availability of ample liquidity in the system, low inflationary expectations and the accommodative monetary policy stance (Table 11.4).