RBI unveils draft guidelines on G-Sec STRIPS

15 May 2009

The Reserve Bank of India yesterday unveiled draft guidelines on stripping/reconstitution of government securities.

In its Annual Policy Statement for the year 2008-09, the central bank had indicated that it has been decided to introduce STRIPS (separate trading of registered interest and principal of securities) in government securities.

The move is aimed at improving the debt market for retail investors as well as institutions like insurance firms, and bond houses.

Stripping is a process of converting periodic coupon payments of an existing government security into tradable zero-coupon securities, which will usually trade in the market at a discount and are redeemed at face value.

Thus, stripping a five-year security would yield 10 coupon securities (representing the coupons), maturing on the respective coupon dates and one principal security representing the principal amount, maturing on the redemption date of the five-year security.

Reconstitution is the reverse of stripping, where, the coupon STRIPS and principal STRIPS are reassembled into the original government security.