Banks are at present allowed to settle securities transaction within five to seven days from the date of transaction on the National Stock Exchange. This had enabled banks to enter into forward deals even though it is not allowed. The RBI move will stop such practice henceforth, an industry source pointed out.

In a circular to all commercial banks, the RBI has said: "It has come to our notice that banks are following a practice of value dating the transactions while undertaking sale and purchase of government securities under which the date of settlement is recorded as the date of the deal and SGL form is lodged on that day or on the day after, though the date on contract was actually entered more than two days ago."

The circular has further clarified that the date of transaction would mean that the date on which the deal is struck and a miximum period of two working days (T+1) from the date of the deal are allowed to lodge SGL transfer form at the local public debt office.

According to a section of traders in the money market, the central bank's move to reduce the settlement period of securities transaction from transaction day plus five days (T+5) to transaction day plus one day (T+1) is a regressive step and will adversely affect trading in the government securities market.

"With reduction in settlement period for security transaction, the already thin government securities market will become thinner and margins will fall. Even the most liquid government security will become illiquid," said a official from a primary dealership outfit.

According to money market traders, the NSE's average turnover which is currently pegged at Rs 100-600 crore will fall sharply.

However, some traders are of the view that this move will not hamper debt market growth as most deals are conducted between the date of transaction plus two days (T+2).

I-Sec head (fixed income), Nitin Jain said: "The move will not have a significant impact on the market as bulk deals in the market are done within (T+2) days. Only a few stray deals are concluded between five to seven days after the transaction day."

Echoing similar sentiments, JP Morgan head (research, fixed income), Ashish Pitale said: "Almost 90 per cent of the deals in the Government securities market are done within one to two days from the transaction day."