Investors urged the Reserve Bank of India to allow state government debt to be turned into zero-coupon bonds, according to people familiar with the matter.

Insurers led the demand for the Separate Trading of Registered Interest and Principal of Securities (STRIPS) facility in state bonds at a recent meeting with the central bank, the people said, asking not be identified discussing private matters. At present, the RBI provides this feature only for federal debt.

Strips, a popular product in US and other developed markets, were first issued in India in 2010 with little success, but volumes have surged in recent years amid greater demand for long-term savings products as the nation grows wealthier.

Allowing state notes to be turned into so-called strip bonds would give investors an extra spread of 30-to-40 basis points over comparable federal securities, one of the people said. State bonds, which are less liquid, are typically sold at higher yields than their central government counterparts.

The RBI didn’t respond to an email request seeking comment.  

In the STRIPS process, bonds are broken into future principal and coupon payments, and then sold as individual securities at a discount to their final value. The principal notes tend to be favored by pension funds and insurers who want longer-duration instruments to match assets and liabilities.

The face value of such debt stood at Rs 1.4 lakh crore ($16.5 billion) as of Sept. 30, compared to Rs 2.5 lakh crore for all of 2023, data from the Clearing Corp. of India show. The value of trades has more than tripled since 2020-21.

. Read more on Economy & Finance by NDTV Profit.Allowing state notes to be turned into so-called strip bonds would give investors an extra spread of 30-to-40 basis points over comparable federal securities.  Read MoreEconomy & Finance, Markets, Nation, Bloomberg 

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