Markets responsive to credit policy, says Rakesh Mohan

Mumbai, Jan 31 | Updated: Feb 1 2006, 05:30am hrs
Post-reverse repo and repo rate hike in the third quarter review of the credit policy of Reserve Bank of India (RBI), Rakesh Mohan, deputy governor, RBI, has commented that markets are responding to the policy measure and RBI is observing the situation carefully, he said this while addressing a seminar on Indian Debt Markets arranged by Fitch and Citigroup in Mumbai on Tuesday.

Further speaking about the tight liquidity condition prevailing in the market he said, The current injection of liquidity through instruments like repo auction mechanism to the extent of Rs 10,000 crore to Rs 15,000 crore is not abnormal. However, it is difficult to say how long such a liquidity pressure will exist in the market. He further said the RBI plans to extend the success of NDS order matching system soon to the mutual fund players. Pertaining to the FII limits in the debt market, Dr Mohan said that during a situation when the Forex reserves are accentuating, any addition in forex reserves has to be sterilised.

However if the FII investment in debt is increased, the cost of sterilisation proves to be higher than the expected returns. This difference between the Market Stabilisation Scheme (MSS) cost and the cost of reserves is the interest paid by government which ultimately is passed to tax payers.

Commenting on corporate debt market he said the corporate debt markets in India are suffering from opacity in primary issuance as well as secondary trading, thin liquidity and inefficient settlement system. Hence, we need to concentrate on simplifying the trading platform, clearing and settlement system and try to bring down cost of issuance of corporate bonds. We also need to design products as per the risk taking capacity of different investors to facilitate more liquidity in the debt markets, he said.