RBI Permits STRIPS Trading in State Government Bonds to Enhance Liquidity

The Reserve Bank of India (RBI) has announced the introduction of Separate Trading of Registered Interest and Principal of Securities (STRIPS) for State Government Securities (SGS). This facility will now be available for all fixed coupon SGS having a residual maturity of up to 14 years and a minimum outstanding amount of ₹1,000 crore as on the day of stripping.

STRIPS and Its Mechanism in SGS

Stripping involves converting the periodic coupon payments of an SGS into individual tradable zero-coupon securities. These instruments typically trade at a discount and are redeemed at face value. In addition to stripping, SGS will also be eligible for reconstitution, the reverse process where Coupon STRIPS and Principal STRIPS are combined to recreate the original security.

Operational Framework and Eligibility Conditions

According to the RBI, only SGS that are eligible for Statutory Liquidity Ratio (SLR) requirements and are transferable will be allowed for stripping. This initiative supplements the existing facility available for Central Government dated securities since April 1, 2010. Market participants with a Securities General Ledger (SGL) account can initiate stripping or reconstitution requests directly via the RBI’s e-Kuber system. Gilt account holders are required to channel such requests through their custodians, who maintain the Constituent SGL (CSGL) account with the RBI.

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Conclusion

By enabling STRIPS in eligible State Government Securities, the RBI aims to deepen the sovereign bond market and provide investors with greater flexibility and investment options in managing their fixed-income portfolios.

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