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Anirban Nag & Prathiba Rathore
The Reserve Bank has not been able to fulfil quite a few promises it made in the earlier credit policies. While a few pertain to the money and the gilts market, a major initiative that the Reserve Bank had announced in the October 31, 1998, policy which has not been kept is the setting up of a high powered National Payments Council.
"The Reserve Bank will take major initiatives in establishing a real-time gross settlement (RTGS) under the guidance of a high-level National Payments Council, which will be set up soon," the mid-term review of the monetary and credit policy for 1998-99 said.
Sources say that the setting up of the council has been delayed because of differences over who should represent the Reserve Bank in the same. While Reserve Bank governor Bimal Jalan wanted to appoint a certain deputy governor (DG) to the council, the DG in question refused to do so on grounds that the Reserve Bank should be represented in the high powered council ideally by the governor. The governor is yet to take adecision on the matter.
Among other promises not kept is the introduction of the interest-rate swaps. "With a view to further deepen the money market as also to enable banks, primary dealers and all-India financial institutions to hedge interest rate risks, the Reserve Bank has decided in-principle to create an environment that would facilitate introduction of interest-rate swaps," the Reserve Bank said in its mid-term policy.
The Reserve Bank had drafted guidelines on the issue, which were supposedly to be announced in March. While the draft guidelines had said that commercial banks, primary dealers and corporates will be allowed to enter into interest-rate swaps, no decision has yet been taken on whether all corporates are to be allowed to enter into interest-rate swaps. "Overseas only those corporates, which have a good credit rating are allowed to conduct swaps. Prudential norms are likely to be applied as a credit risk is involved for the bank and the primary dealers when entering into interest rateswaps," a source said.
The Reserve Bank has said that the capital adequacy norms for banks will apply as per a department of banking operations and development (DBOD) circular, issued in 1992. The calculation of risk-weightage will be based on the norms laid out in the circular. The circular says that the credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the face-value of each of the balance sheet items by the credit conversion factors.
The Reserve Bank says that if the original maturity of the swap is less than one year--as most interest rate swaps are expected to be--the notional principal amount of each instruments should be multiplied by 0.5 per cent, while for maturities of one and less than two years, the principal has be multiplied by 1.0 per cent. For each additional year the notional principal will be multiplied by 1 per cent for calculation of risk weights.
Interest rate contracts include single currency interest rate swaps, basis swaps,forward-rate agreements, interest-rate futures, interest-rate options purchased and other contracts of a similar nature. The RBI is yet to extend support through a liquidity adjustment facility operated by the way of repos providing a reasonable corridor for market play. The central bank is facing certain procedural and technological constraints in this. For example, although the Reserve Bank wants to do away with the present general refinance facility, it has not been able to fix the level of refinance for each bank. The central bank has suggested that the banks should be allowed the facility upto the excess of SLR securities held by them.
Further, the RTGS system has to be put in place for the LAF to take off. Till now the committee set up to look into the setting up of RTGS is still working and yet to make any concrete recommendation. The Reserve Bank has also decided that a the export credit refinance will continue as a separate scheme and reviewed independently. The introduction of 28-day T-bills and182-day T-bills has also been delayed. "It has been put on hold since there was reduced investor interest in T-bills due to unprecedented market developments.
"With the continuous availability of fixed-rate repos for absorption of liquidity, the proposal to use one day repos/reverse repos for liquidity adjustment has also been deferred," the RBI said in its mid-term credit policy.
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
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