Size and liquidity of government securities in India

The study examines the role of enhancing the supply of securities to attain a certain size to influence liquidity of government securities. Using the data on Government of India securities, the study finds that the debt management strategy based on enhancing the supply of securities contributes to the market liquidity of government securities. The marginal contribution of increase in outstanding amount to market liquidity, however, declines sharply by 82 per cent after a threshold level. The findings of the paper further suggest that on-the-run securities and the securities with market aligned coupon rate enjoy a significantly higher liquidity. An important finding of the paper relates to the threshold value of the size of the security when liquidity is at the maximum beyond which the liquidity declines significantly. The threshold size is estimated to be about Rs. 35,000 crore for the sample period.