THE Reserve Bank of India (RBI) is planning to introduce a mechanism of stripping

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government bon-ds into principal and interest to attract high net worth individuals (HNIs) and retail investors. Under the new guidelines, an individual may be able to invest as little as Rs 1,000 and in multiples thereof. The investor could trade either in the principal or coupons with varying maturities. If adopted, this will be the first time bonds will be stripped in India.

Retail participation in government bonds is allowed even now but a minimum investment of Rs 100,000 is required.

“The central bank is trying to increase the tradeability of the bonds for deeper bond market participation. The regulator may allow investments of as small an amount as Rs 1,000,” according to senior bankers who have given feedback to the central bank on the draft guidelines for separate trading of registered interest and principal interest in government securities (STRIPS).

At present, institutional investors and public sector banks dominate the debt market, particularly the government bond market.

Bankers say the absence of a well-developed yield curve in the government bond (g-sec) market will impede implementation of STRIPS. The volatility in bond prices makes it difficult to price the coupons (interest rates). Infrastructure is yet another challenge. At present, retail investors can invest in government bonds only thro-ugh primary dealers.

“But once the market develops, banks may also be allowed to sell these instruments. The concept will have to be introduced and the market developed around it. The market is excited at the prospect of trading the coupons (interest),” said RVS Sridhar, senior vice-president of treasury at Axis Bank.

Attracting more investors to the debt market has become essential as the government borrowing is set to be higher than anticipated. The net additional borrowing during the present financial year is estimated to be Rs 89,310 crore. This translates into borrowing of Rs 10,000-12,000 crore per week till the first week of September because the borrowing programme is expected to be frontloaded in the first half of the financial year. The government is also planning to unwind Rs 33,000 crore market stabilisation bonds to prevent disruption of the market.