Indeed, relying on the repeated indications by the authorities that the softer interest rate stance would continue, the Gilt market expected that there would be a bank rate cut and a cut in CRR. While the announcement does mention about 50 bps bank rate cut, the market is uncertain when it would be.
Again, as regards CRR, though the 50 bps rate cut is proposed by June 15, 2002, it also states that such a cut could as well be before that.
Thus on these important points, the perception that the Policy is not always the platform for announcement of the Policy decisions (unlike the earlier days) is reestablished.
Gilt market participants expected some happenings in the Policy on the above points. Indeed, the Gilt market had already discounted a bank rate cut reducing it in the yields: both primary and secondary.
Now that both have not taken place, yields on Gilts may also firm up in the meantime.
Added to the above, the market participants, especially the PDs, also have apprehensions on the proposal to restrict the banks to lend in call/notice money market to 25 per cent of the net owned funds.
This is likely to put the PD’s into avoidable difficulties, as PD’s fund their Gilt assets mainly relying on call/notice money market. Besides, the lending banks themselves may experience problems at their end in deploying their short-term surplus funds during the day.
Further, the Policy also proposes to have a roadmap to phase out PD’s from call/notice money market in course of time.
When PD’s are expected to play a greater role in underwriting and bidding in the “auctions” of Government securities and the Government borrowings are only increasing year to year, the proposed restrictions in the call money market with limited assured liquidity support, it is too early to think if phasing out PD’s from call money market without harming the gilt markets until alternative cost effective source of funding is developed for them.