Medium-Term Debt Management Strategy (MTDS)

• The Reserve Bank of India, in consultation with the Government of India, has placed Medium-Term Debt Management Strategy (MTDS) for a period of three years (2015-16 to 2017-18).
•  The strategy document contains the objectives, risk analysis of Government borrowings and strategy to be followed.
•  MTDS has been prepared based on sound international practices and taking into account the domestic economic and financial conditions.
• MTDS would be updated on an annual basis to reflect the emergent conditions.
•  Government aim to better manage public borrowing, government plans to switch Rs 50,000 crore high cost debt each in year ending March 2017 and 2018 into instruments of longer term maturity
•  It is expected that the borrowing cost in the domestic market is expected to be lower in fiscal year 2015-16 due to reversal in the interest rate cycle.
•  The main objective of this policy is  to smoothen redemptions, switching of short tenor bonds maturing at proximate years with long-tenor bonds will be undertaken and is expected to reduce rollover risks.

About debt management strategy

•  The objective of the debt management strategy (DMS)  is to secure the government’s  funding at all times at low cost over the medium /long term while avoiding excessive risk.
•  The DMS has  been articulated in  medium-term for  a  period  of  three  years  and  it  may  be  reviewed annually and rolled over for the next three years.
•  The scope of debt management strategy is restricted  to  active  elements  of  domestic  debt  management, i.e. ,  marketable  debt  of  the Central Government only.
•  Over time, the scope would be progressively expanded to cover the entire stock of outstanding liabilities including external debt as well as General Government Debt including SDL.
•  The debt  management  strategy  revolves  around  three  broad  pillars ,viz.,low  cost,  risk mitigation and market development.
•  Low cost objective is attained by planned issuances and offer  of  appropriate  instruments  to  lower  cost  in  medium  to  long-run,  market  conditions, preferences  of  various  investor  segments,  improved  transparency  by  way  of  a detailed  issuance calendar.
•   Following risk  management tools  have  been adopted  to  reduce  the  risk  associated with the sovereign debt:

a)Adoptionof portfoliomanagementpracticesandcreatingprudentdebtstructure bycontaining rollover risk through switches / buy back;

b) Lowering interest rate risk by keeping floating rate debt low;

c) Managingforeigncurrencyriskbyissuingdebtindomesticcurrency,developing stabledomesticinvestorbaseandcalibratedopeningofG-secmarket to foreign investors; and

d) Reducing rollover risks by elongation of maturity and establishing limits on security issuances and annual maturities. Reserve Bank, in consultation with the Government, will continue its effort in development of the G-sec market by a series of measures such as introducing new instruments, expanding the investor base, strengthening market infrastructure, etc.

•  Scenario  analysis, which  contains  expected  cost  of  debt  based  on  the  assumptions  of  future interest  and  exchange  rates  and  future  borrowing  needs, are  included. 
• Debt sustainability indicators, such as, debt to GDP, average time to maturity and interest expense to GDP are projected. 
• Stress  tests  of  the  debt  portfolio  on  the  basis  of  the  economic  and  financial shocks, to which the government are exposed, are conducted and indicate a very low level of stress. 
•  This confirms  that  the  debt  is  stable,  sustainable  over  medium  to  long  run..

By: Vishal