Regulatory Revisit Essential to Boost STRIPS Bonds Growth, Experts Say

The Separate Trading of Registered Interest and Principal Securities (STRIPS), commonly known as zero-coupon bonds created from government securities, holds significant potential to deepen India's debt market and improve price discovery, yet their growth remains constrained by regulatory and operational hurdles. Introduced by the Reserve Bank of India in 2010, STRIPS allow investors to separate the principal and interest components of eligible G-Secs, creating pure discount instruments with fixed maturities. Despite the promise of better risk management, hedging, and portfolio diversification, the market has seen limited traction, with trading volumes remaining modest compared to conventional bonds.

Standardization of trading, settlement, and reporting mechanisms is widely seen as critical to unlocking exponential growth in the STRIPS segment. Currently, the lack of uniformity in pricing conventions, limited participation by certain investor classes, and complexities in tax treatment have deterred broader adoption. Experts argue that a regulatory revisit—particularly in areas such as uniform yield calculation, streamlined clearing and settlement through a central counterparty, and clearer taxation guidelines—could significantly enhance liquidity and transparency. Improved standardization would also facilitate fair price discovery, reduce information asymmetry, and attract long-term institutional investors, including pension funds and insurance companies seeking predictable cash flows.

The current fragmented nature of the STRIPS market has resulted in lower liquidity and higher transaction costs, limiting its appeal despite the inherent advantages of zero-coupon structures. Unlike regular G-Secs, STRIPS offer investors the ability to lock in yields without reinvestment risk on coupons, making them particularly valuable for asset-liability matching. A more robust framework could also encourage primary market issuances of STRIPS directly by the government, further expanding the investor base and contributing to a more efficient government securities market overall.

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Industry participants and market observers have called for targeted reforms by the RBI and SEBI to address these bottlenecks. Key suggestions include aligning STRIPS trading conventions with international best practices, introducing dedicated trading windows or platforms, and providing incentives for market makers. Such measures could lead to a virtuous cycle of higher volumes, tighter bid-ask spreads, and greater participation, transforming STRIPS from a niche product into a mainstream instrument in India's fixed-income ecosystem.

As India aims to develop a more mature and liquid bond market to support economic growth and infrastructure financing, revisiting the regulatory architecture for STRIPS presents a timely opportunity. A focused push toward standardization and simplification could unlock substantial untapped potential, driving deeper market participation, better risk pricing, and enhanced efficiency in the government securities market over the coming years.

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