Financial Daily from THE HINDU group of publications
Thursday, Jul 04, 2002
Financial Daily from THE HINDU group of publications Thursday, Jul 04, 2002 |
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Money & Banking
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Govt Bonds Government - Policy Govt to introduce put, call option in market borrowings Our Bureau
NEW DELHI, July 3 THE Government has taken a decision to introduce a put and call option in the next tranche of its market borrowings. An in-principle decision to introduce this has been taken and the Reserve Bank of India, the Government's debt manager, will finalise the details shortly, according to senior Finance Ministry officials. This is the first time that the Government is incorporating this in its market-borrowing programme. A put option gives the right to sell while a call option gives the right to buy. By incorporating this in its borrowings, the Government will have the option for instance to retire relatively costly borrowings mid-way through the tenor of the loan instead of keeping it on the books until maturity. By exercising the call option, the Government can effect savings on interest cost instead of continuing to pay fixed interest rates for long tenors. The Government has budgeted for gross borrowings of Rs 1,42,779 crore during this fiscal. In 1996-97, the average yields in the primary auctions of dated securities of two to 10-year maturity were in the range of 13.40 to 13.85 per cent. In subsequent years, the yields declined and along with it the Government and the RBI managed to influence the maturity pattern of debt issues towards medium and long-term. In the absence of an exit option, the Government will continue to pay a relatively high interest rate for the borrowings carried out in 1996-97 until the maturity of the loan. This is now being sought to be corrected. However, it remains to be seen how the market will react to this move. The market may price the yield based on the call option. In other words, if the option is put after five years in a 10-year or a 20-year borrowing, the market will factor in the five-year yield, according to dealers. In the deep discount bonds issued by the financial institutions, there is a put and call option provided after five years.
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