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Our Banking Bureau
Mumbai, Sept 22: The Reserve Bank of India has said that it will not provide further concessional finance to the six primary dealers (PDs) operating in the money market for market-making activities.
"Concessional finance to PDs cannot be a funding source. They have to mobilise funds through issuance of commercial papers and term money. The current refinance will continue, but this should not be the only way to fund operations," Usha Thorat, chief general manager at RBI, told a conference arranged by Invest India on the "Furture of Debt Market in India."
The RBI also said that it does agree that short selling should be allowed. "Short selling will provide liquidity and we do agree that short selling of government securities should be allowed," Thorat said while participating in a panel discussion on "long-term bond market". At present, short selling is banned under the Securities Contract Regulation Act 1969.
"We have been trying to get around this by introducing repos and reverse repos in particularsecurities and to a restricted number of non-banking entities and all banks. But a comprehensive dialogue has to be intitiated and we are open to the issue as we are actively looking at the issue," Thorat told the panelists.
She admitted that the OMO will emerge as a more effective tool for liquidity management replacing the cash reserve ratio (CRR).
She agreed that the market-making facilities should be allowed to primary dealers, but denied that availability of adequate liquidity is hampering them. "But I do not believe that concessional credit should be provided to them for market making," she said. Moreover, the RBI feels that if PDs are allowed a free hand in market making, it might add to the volatility in the market.
"If these is a case for mopping up liquidity and the PDs start buying securities, it will add to the volatility. We would not like this," she told the panelists.
N Gopalakrishnan, managing director at SBI Gilts, who had participating in the panel discussion, said that the RBIshould stop being a market maker in the government securities market.
State Bank for trade-guarantee corporation:
State Bank of India deputy general manager K Rajagopal mooted the concept of a trade guarantee corporation (TGC) to guarantee trades entered into between two parties and maintaining counter-party secrecy. "Regulators should introduce hedging options in the debt market and allow short-selling to market-makers. Settlement systems should also be on real time and day-and-night settlement systems should be set up," Rajagopal said.
Making a case for PDs being allowed concessional finance to become effective market-markets, Rajagopal said, "PDs should be allowed market making and concessional finance should be made refinance to them."
According to him, the repo market should be standardised and proper accounting procedures should be established. He also called for the development of a self-regulatory organisation (SRO) as it increases the interface with the regulator and the marketplayers and also helps in the formulation of procedures and best practices.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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