The Strips Programme and Its Implications for the Indian Gilts Market - A Note

Abstract

It is well known that the secondary market for debt is not as efficient as the stock markets in India and efforts have been made to develop the secondary debt market, through the introduction of both regulatory measures and innovative products. A new product that is being contemplated upon is Strips, or zero coupon fixed income securities, created through a facility that would allow converting each coupon payment of a gilt into a separate security. This article traces the roots of Strips to the US Treasury debt market and taking clue from the US market for Strips, sketches the potential benefits derivable by investors and traders in the Indian market, like banks, financial institutions, insurance companies, provident funds, mutual funds, foreign institutional investors (FII), as well as individuals. We discuss how trading in Strips adds liquidity to the secondary gilts market and leads to the existence of an economically relevant yield curve for the economy, which is so far non-existent in the Indian financial market. Some pre-requisites for the new product to be successfully launched are also examined, among which automated trading, clarity in taxation issues and the number of securities to be brought under the purview of the programme are important considerations.

Keywords: Indian debt market, gilts yield curve, STRIPS, monetary policy

JEL Classification: E44, G12