The Reserve Bank of India (RBI) recently announced that it will allow the use of Strips (Separate Trading of Registered Interest and Principal of Securities) and reconstitution of State Government Securities (SGS), or State Development Loans (SDLs). This move comes after discussions with various state governments and feedback from market participants.
The central bank has essentially extended Strips, effective June 12, to state government securities/ bonds, allowing interest and principal to be traded separately on bonds with maturities up to 14 years and over ₹1,000 crore outstanding. “By extending Strips to state government securities, the central bank is enabling true zero‑coupon instruments across SDLs. When ₹100 of the 8.60% GS 2028 is stripped, each semi‑annual coupon of ₹4.30 and the ₹100 principal become tradable standalone securities, allowing investors to precisely match future cash flows. This enhances price discovery, deepens liquidity, and paves the way for a transparent zero‑coupon yield curve in state debt,” said IndiaBonds.com co-founder Vishal Goenka.
Strips are fixed-income instruments created by breaking up a standard bond into its cash flows. This means the interest payments (coupons) and the final principal repayment are separated and traded independently as zero-coupon securities. This facility has already been available for the central government bonds since 2010. Now, it will apply to state government bonds as well, thus boosting liquidity and widening the investor base.
“For instance, suppose you hold a 10-year state government bond with an annual coupon of 7%. Each year, you receive ₹70 as interest and ₹1,000 as principal at the end of 10 years. In Strips, each ₹70 annual interest and the ₹1,000 principal are turned into separate securities, each of which can be bought and sold individually,” explained Goenka.
How are Strips beneficial?
Predictability: Since there are no reinvestment risks (as with periodic coupons), investors can precisely match their investment to future liabilities, such as tuition fees or retirement needs.
Simplicity: They have a clear, known maturity value and date, making them easy to understand to plan.
No interim reinvestment required: Particularly helpful in volatile interest rate environments.
High credit quality: Strips created from sovereign or state government bonds typically carry similar credit quality.
Improved liquidity: With the RBI now allowing Strips for SDLs, it could lead to a deeper, more liquid secondary market for state bonds.
What are the risk factors?
Interest rate risk: Strips are more sensitive to changes in interest rates compared to regular bonds due to their long duration.
Liquidity risk: If trading volumes are low, especially for newly stripped securities or less popular maturities, it may be difficult to exit before maturity.
Price volatility: With no interim cash flows to cushion market fluctuations, their prices can be more volatile.
Can retail investors access them?
Retail investors can participate. With the RBI Retail Direct platform, individuals can access both primary issuances and secondary market trades in GSecs and SDLs by opening a Retail Direct Gilt (RDG) account. “Once state-issued Strips become available, retail buyers can purchase them in ₹10,000 increments—either at auction via the non-competitive window or later in the secondary market—directly through RBI Retail Direct and possibly other Online Bond Platform Providers. The recent move also holds promise for long-term investors like insurers and pension funds seeking duration-matching assets,” said Goenka.
What is the minimum investment required for retail investors to buy them?
According to the RBI, all eligible state government securities (with residual maturity up to 14 years and a minimum outstanding of ₹1,000 crore) can be stripped and traded as individual zero-coupon instruments. “These originate from bonds typically available in ₹10,000 face value lots, which also serves as the minimum denomination for purchase—that means any Strip will carry a ₹10,000 minimum ticket size, and in multiples thereof, although this may be confirmed once Strips trading for SDLs formally begins,” added Goenka.
