In yet another money market measure, the RBI in order to enable banks, primary dealers and financial institutions to hedge risks allowed them interest rate swaps. "Those players who participate in call or notice money market either as direct lenders or borrowers are proposed to be permitted to undertake interest rate swaps," said the policy document.

A section of market feels that one-day repo may not have a positive impact on the market under the present conditions when the call rates are hovering almost 100 basis points above the repo rates at 9 per cent which is equal to the bank rate. "Under tight liquidity conditions, the market will prefer to lend in call than go in for a fixed rate repo," said a fund manager from SBI gilts. "Under easy liquidity conditions,the one-day repo would serve as a good money market instrument," sources said.

Market experts are of the view that reduction of time period for repo transaction from three-day to one day will give a much needed depth to the under developed repo market, widen the repo market and increase the number of players in the market and induce more flexibility during repo transactions.

RBI had placed restriction of a minimum period of 3 days for ready forward transactions effective from September 30, 1995. The central bank has said in its busy season credit policy statement that in the backdrop of the inter-bank liabilities having been exempted from requirements of maintenance of CRR and with a view to enable banks and other participants in the repo market to adjust their liquidity in a more flexible manner, it has decided to withdraw th minimum restriction period for ready forward transactions.

By withdrawing the fixed rate repo, the central bank will encourage players to frequently conduct repos in exchange ofsecurities and get a better deal than sell it at a much depreciated value in slack gilts market, sources in RBI said.

Money market experts are of the view that primary dealers having liquidity crunch will be able to access short term one-day funds from the central bank. "Withdrawal of restriction for carry forward repo transaction will largely benefit primary dealers who are provided with liquidity support by the central bank," said money market sources.

The RBI's internal working group headed by N V Deshpande set-up to study the regulatory aspect of the financial market has also called for development of a standard form of repos agreement and codifying best practices for market participation for the development of the Indian repo market.

According to the working group, there should be a `standard repo contract' governing repo transactions which should make provision for conflicting issues like interest rate risk if yield towards maturity (YTM) of the security sold during repo transaction changes anddefaults.

The order to deepen the repo market, the central bank has already thrown open the primary government securities market for private and foreign players. The RBI on Thursday granted "in principle" approval to seven entities to play in the government securities market.