RBI Introduces STRIPS in State Government Securities

In a move that marks a significant step toward deepening the government securities (G-Sec) market, the Reserve Bank of India (RBI), after consultations with State Governments, Union Territories, and key market participants, has announced the introduction of Separate Trading of Registered Interest and Principal of Securities (STRIPS) in State Government Securities (SGS). This development, notified in the Official Gazette on May 29, 2025, extends the concept of STRIPS—previously limited to eligible Central Government dated securities—to SGS, thereby expanding the range of risk-free instruments available for trading and investment.

What Are STRIPS?

STRIPS involve splitting a standard coupon-bearing government bond into its individual cash flows—each interest payment and the principal repayment. These separated components are then traded as zero-coupon instruments. For instance, a 10-year State Government bond with annual interest payments can be stripped into 11 components (10 interest payments + 1 principal repayment). Each component is a zero-coupon bond with a defined maturity and is traded separately in the market.

Eligibility Criteria

Not all SGS are eligible for stripping. To qualify:

1. The bond must be a fixed coupon security issued by a State Government or Union Territory.
2. It must have a residual maturity of up to 14 years at the time of stripping.
3. A minimum outstanding amount of ₹1,000 crore is required.
4. The security must be SLR-eligible and freely transferable.

This ensures that only liquid and widely held bonds are eligible, preserving market stability and transparency.

How to Participate

Market participants with an SGL (Subsidiary General Ledger) account with the RBI can place stripping or reconstitution requests directly through the RBI’s e-Kuber platform.

For Gilt Account Holders (GAHs)—such as mutual funds, insurers, and pension funds—their custodians (who hold CSGL accounts) will process the stripping/reconstitution on their behalf through e-Kuber.

This two-tier system ensures access for all classes of investors while maintaining oversight and accountability through custodian intermediaries.
Standardization and Continuity

The nomenclature and ISIN structure for STRIPS in SGS will mirror the existing format used for Central Government STRIPS. This uniformity is expected to facilitate seamless recognition and trading.

Furthermore, all terms and conditions as laid out in previous RBI circulars (dated October 16, 2009; April 10, 2018; and March 25, 2010) will apply “mutatis mutandis” to the SGS STRIPS framework. This ensures consistency in operation and compliance standards, preventing regulatory fragmentation.

Why It Matters

The introduction of STRIPS in SGS is more than a technical tweak—it reflects a maturing Indian bond market. STRIPS offer:

1. Duration-specific investment options for investors needing to match liabilities with specific maturities.
2. Improved liquidity in the secondary market, especially in long-dated instruments.
3. Increased transparency in state-level borrowing.

For retail investors, insurance companies, pension funds, and banks, STRIPS in SGS provide a risk-free, flexible tool for portfolio management.

Conclusion

With this policy extension, the RBI not only empowers State Governments by expanding the investor base for their securities but also enhances the overall robustness of the Indian debt market. This move aligns well with India’s broader financial market reforms aimed at efficiency, transparency, and investor confidence. As the market adopts these instruments, greater liquidity, price discovery, and depth are expected to follow—ushering in a more resilient and dynamic fixed income ecosystem.