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Anirban Nag
Mumbai, Dec 9: The Standing Committee on Money Markets, headed by Reserve Bank of India deputy governor YV Reddy, has recommended that the RBI may allow corporates to enter into reverse repo deals with the central bank.
The proposal was discussed threadbare at the last meeting of the committee attended by former RBI deputy governor SS Tarapore, Securities Trading Corporation of India chairman D Basu, NSDL managing director CB Bhave and professor of Indira Gandhi Institute of Developmental Research, Ajay Shah.
Corporates traditionally park their surplus cash in treasury bills and short-term government securities. Sources said that the facility of repos to public sector undertaking (PSU) bonds was also discussed by the committee but the Reserve Bank struck down the proposal as it said that it had better control over the government securities market.
An RBI spokesperson said that the committee makes recommendations from time to time and the central bank examines these proposals on an "on-going basis". Sherefused any further comment on the issue.
However, the development assumes significance as RBI governor Bimal Jalan had stated in the October mid-term credit and monetary review that measures would be taken to widen the repo market and improve non-bank participation in a variety of instruments.
Analysts interpreted the move as a prelude to the RBI shifting towards a pure inter-bank call/notice term money market which includes primary dealers. Currently, corporates are allowed to only lend in the money market through primary dealers (PDs), but both corporates as well as PDs are required to seek permission from the RBI before doing so. They cannot borrow under any circumstances like the financial institutions in the money market.
It is proposed that reverse repos will be conducted by the corporates only with the Reserve Bank. Under this operation, a corporate can park his securities for three days with the RBI at 8 per cent and take cash from the central bank (assuming the repo period is for three days).In this manner, the corporates are able to make a better return on their securities.
"Allowing corporates into this market will definitely help in better treasury management (by corporates)," an analyst in a leading brokerage firm said. According to him, corporates can tide over their short-term liquidity problems by keeping the securities with the RBI and receiving cash in return.
INSIGHT
A welcome move
Allowing corporates in reverse repos will lead to two consequences, both welcome. First, corporates will be able to get funds for short periods from the RBI. Second, this in turn will induce them to invest in government securities. Primary dealers had had some trouble in unloading securities in the retail market, and this measure should help in developing such a retail market for government securities.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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