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Daily News RBI Credit Policies (1999-2005)
Part II. Review of Annual Statement on Developmental and Regulatory Policies for the Year 2005-06
Financial Markets
Money Market
Framework for Development of Money Market
62. As indicated in the annual policy Statement of April 2005, the report of the Technical Group on Money Market was placed on the Reserve Bank’s website for wider dissemination. A screen-based negotiated quote-driven system for all dealings in call/notice and term money markets and an electronic trading platform for conduct of market repo operations in government securities, in addition to the existing voice-based system, are being developed by the Clearing Corporation of India Ltd. (CCIL). Furthermore, information on commercial paper (CP) issuance as reported by the issuing and paying agents (IPA) on the negotiated dealing system (NDS) platform, has been made available on the Reserve Bank’s website with effect from July 2005 to enhance transparency and facilitate wider dissemination. The recommendations of the Group on introduction of asset-backed commercial paper (ABCP), introduction of additional intra-day LAF and optionalities in OTC rupee derivatives are under examination.
Government Securities Market
(a) Central Government Securities Market
63. On the basis of the recommendations of the Technical Group on Central Government Securities Market, the annual policy Statement of April 2005 indicated that in the post-Fiscal Responsibility and Budget Management (FRBM) Act period, the Reserve Bank will reorient government debt management operations while simultaneously strengthening monetary operations in order to prepare for withdrawing from primary financing of the Central Government’s borrowing programme, effective April 2006. Accordingly, the Reserve Bank has constituted a new department named as Financial Markets Department (FMD) in July 2005 with a view to moving towards functional separation between debt management and monetary operations. To begin with, the functions of the FMD include open market operations (OMO), the liquidity adjustment facility (LAF), market stabilisation scheme (MSS) and standing liquidity facilities; regulation and development of money market instruments and monitoring of money, government securities and foreign exchange markets. The functions of the FMD would also cover the Reserve Bank’s operations in the domestic foreign exchange market, in due course, in order to achieve the desired integration with conduct of monetary operations.
64. The recommendations of the Technical Group relating to restructuring the underwriting obligations of primary dealers (PDs), allowing PDs exclusivity in primary auctions, introduction of ‘When Issued Market’ and limited short selling in government securities were examined by the Reserve Bank in consultation with the Government. Accordingly, as a first step, it is proposed:
• to introduce intra-day short selling in government securities. Guidelines in this regard would be issued separately.
(b) Operationalisation of Electronic Trading Platform
65. As indicated in the annual policy Statement of April 2005, a screen-based order-driven anonymous NDS Order Matching (NDS-OM) Module has been operationalised in August 2005. In the first phase, the NDS-OM module has been introduced for RBI-regulated NDS members. By end-September 2005, 117 members were active in the module with NDS-OM volumes covering about two-thirds of the total outright transactions in dated government securities in the secondary market. It is now proposed:
• to extend NDS-OM module to all insurance entities which are mandated to invest in government securities. Guidelines in this regard would be issued separately.
(c) Revision of WMA/Overdraft Scheme for State Governments: Status
66. The Committee on Ways and Means Advances (WMA) to State Governments (Chairman: Shri C. Ramachandran) had recommended inter alia that the formula and the limits of WMA may be reviewed in totality after the receipt of the recommendations of the TFC. Accordingly, an Advisory Committee to Review the WMA Scheme was constituted in April 2005 (Chairman: Shri M.P. Bezbaruah). The Committee would submit its report shortly. The report would then be discussed with the State Governments.
Foreign Exchange Market
(a) Forex Market: Medium-term Framework
67. As indicated in the annual policy Statement of April 2005, the report of the Internal Group on Forex Market was placed on the Reserve Bank’s website for wider dissemination. The recommendations of the Group, particularly those on writing of covered options by corporates, hedging of economic risk of corporates in respect of their domestic operations arising out of changes in the landed cost of the imported substitutes of the commodities they consume/produce and crystallisation of overdue export bills are under examination.
(b) External Commercial Borrowings: Expansion
68. Currently, external commercial borrowings (ECBs) proposals of financial institutions dealing exclusively with infrastructure or export refinance such as Infrastructure Development Finance Company, Power Finance Corporation, Power Trading Corporation, Indian Railway Construction Company and Exim Bank are considered by the Reserve Bank on a case-by-case basis under the approval route. It is
clarified that:
• Special purpose vehicles (SPVs) or any other entity notified by the Reserve Bank, which are set up to finance infrastructure companies/projects, would be treated as financial institutions and ECBs raised by such entities would be considered under the approval route.
69. With a view to facilitating capacity expansion and technological upgradation in the Indian textile units after phasing out of the Multi-Fibre Agreement, it is proposed:
• to allow banks to issue guarantees or standby letters of credit in respect of ECBs raised by textile companies for modernisation or expansion of textile units. Such applications would be considered under the approval route subject to prudential norms.
<<< Back To MAIN PAGE OF Mid-term Review of Annual Policy for the year 2005-06
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