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Main Page of Mid-Term Review of the Annual Policy Statement for 2008-09 click here

Mid-Term Review of the Annual Policy Statement for 2008-09

Part B. Mid-term Review of Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

II. Financial Markets

Money Market

(a) Special Market Operations

129. The Reserve Bank announced Special Market Operations (SMO) on May 30, 2008 on an ad hoc and temporary basis to minimise potential adverse consequences for financial markets and for overall financial stability in view of liquidity and other related issues arising from the unprecedented escalation in international crude prices. Under the SMO, the Reserve Bank conducted open market operations in the secondary market through designated banks in oil bonds held by public sector oil marketing companies in their own accounts subject to an overall ceiling of Rs.1,500 crore on any single day and provided equivalent foreign exchange through designated banks at market exchange rates to the oil companies. The SMO was terminated effective from August 8, 2008. Taking into account the continuing uncertain global situation and the potentially adverse implications for domestic financial markets, the Reserve Bank announced on October 15, 2008 that it has decided to reinstitute a similar facility when oil bonds become available.

(b) Second Liquidity Adjustment Facility

130. The Reserve Bank operates a liquidity adjustment facility (LAF) to inject/absorb liquidity through daily repo/reverse repo auctions. These operations are conducted in the forenoon between 9.30 A.M. and 10.30 A.M. In response to suggestions from market participants for fine-tuning the management of bank reserves on the last day of the maintenance period, a second LAF (SLAF) on reporting Fridays was introduced with effect from August 1, 2008 which is conducted between 4.00 P.M. and 4.30 P.M. In view of the recent extraordinary global developments, the SLAF is conducted on a daily basis beginning September 17, 2008.

131. Taking in to account the continuing uncertainty and its indirect impact on our financial markets, the Reserve Bank decided to conduct a special 14-day repo for a notified amount of Rs.20,000 crore on October 14, 2008 with a view to enabling banks to meet the liquidity requirements of mutual funds. As only Rs.3,500 crore was utilised on October 14, 2008, this 14-day repo facility was further extended to be conducted every day up to the cumulative amount of Rs.20,000 crore. It was further decided that purely as a temporary measure, banks may avail of additional liquidity support exclusively for the purpose of meeting the liquidity requirements of mutual funds to the extent of up to 0.5 per cent of their NDTL. This accommodation was extended in addition to the temporary measures announced on September 16, 2008 permitting banks to avail of additional liquidity support to the extent of up to 1 per cent of their NDTL. Furthermore, the Reserve Bank relaxed the restrictions on lending and buy-back only in respect of the certificates of deposit (CDs) held by mutual funds effective from October 14, 2008.

Government Securities Market

(a) Central Government Securities

(i) Floating Rate Bonds: Development of NDS Auction Format

132. The Annual Policy Statement of April 2008 had indicated that the Clearing Corporation of India Limited (CCIL) is developing a primary auction module for dated Government securities which would cover all types of instruments, including floating rate bonds (FRBs). Necessary software modifications are being incorporated for issuance of FRBs. The new structure of issuance incorporated in the Negotiated Dealing System (NDS) auction module (Version 2) is being developed by the CCIL. The FRBs will be issued at an appropriate time taking into account the prevailing market conditions.

(ii) Auction Process of Government of India Securities

133. As announced in the Annual Policy Statement for the year 2008-09, the recommendations of the Internal Working Group on the Auction Process (Chairman: Shri H. R. Khan) are in the process of implementation. The major recommendations of the Working Group include reduction in the time gap between bid submission and declaration of auction results, withdrawal of the facility of bidding in physical form and submission of competitive bids only through the NDS. In the first phase, the recommendations relating to the reduction in the time gap and withdrawal of physical bids are being implemented. Some of the recommendations like facilitating direct participation of non-NDS members in auctions through a secured web-based system are under examination.

(iii) Collateral Facility Extended for Savings Bonds

134. On August 19, 2008 the Government of India amended the notifications relating to the 7 per cent Savings Bonds, 2002, the 6.5 per cent Savings Bonds, 2003 (non-taxable), and the 8 per cent Savings Bonds, 2003 (taxable) schemes and allowed for pledge or hypothecation or lien of these bonds as collateral for obtaining loans from scheduled banks in accordance with the provisions of Section 28 of the Government Securities Act, 2006 and Regulations 21 and 22 of the Government Securities Regulations, 2007. These amendments would enable pledge of these instruments for raising of loans by the holders, thereby imparting liquidity to these instruments.

(b) Debt Management for State Governments

Non-Competitive Bidding Scheme in the Auctions of the State Development Loans

135. With a view to widening the investor base and enhancing the liquidity of State Development Loans (SDLs), a scheme for Non-Competitive Bidding Facility has been approved by the State Governments. Accordingly, the General Notifications on issue of SDLs have been amended by the State Governments. The NDS Auction Module (Version 2), which would facilitate introduction of the scheme, is under development by the CCIL. The parallel run of the new Version 2 will commence shortly and the scheme will be operationalised by end-December 2008.

(c) Development of Market Infrastructure

(i) Introduction of Interest Rate Futures

136. A Working Group on Interest Rate Futures (Chairman: Shri V. K. Sharma) was constituted to review the experience gained with interest rate futures since its introduction in India in June 2003, with particular reference to product design issues. The recommendations of the Group were placed before the Technical Advisory Committee (TAC) for Money, Foreign Exchange and Government Securities Markets. Taking into consideration the feedback and comments received from the public, experts, banks, market participants and the Government of India, the report was finalised and has been placed on the Reserve Bank’s website on August 8, 2008. The RBI-Securities and Exchange Board of India (SEBI) Standing Technical Committee has been entrusted with the work relating to the operationalisation of these recommendations. Accordingly, the Committee has initiated work on various issues which broadly fall into three categories: product design and specification issues; exchange related issues and specifications like margins; and regulatory issues for banks. On October 13, 2008 banks were permitted to take trading positions in interest rate futures (IRFs), as recommended by the working group. This will add depth and liquidity to the market. It is expected that IRF contracts as recommended by the Working Group would be launched in early 2009 along with the supporting changes in the regulatory regime.

(ii) Multi-modal Settlement

137. The Annual Policy Statement of April 2008 proposed a new settlement mechanism in Government securities through settlement banks in order to facilitate direct access to NDS and NDS Order Matching (NDS-OM) by participants who do not maintain current accounts but maintain Subsidiary General Ledger (SGL) accounts with the Reserve Bank. Accordingly, guidelines were issued on June 2, 2008 to operationalise the mechanism. Secondary market transactions in Government securities are being settled only through the designated settlement banks (DSBs) with effect from June 30, 2008. Arrangements for settlement of primary auction bidding under the new mechanism are being worked out.

(iii) Access to NDS-OM Through CSGL Route

138. Access to the NDS-OM segment, which was launched in August 2005, was initially allowed to commercial banks and primary dealers (PDs) and later to other NDS members such as insurance companies, mutual funds and large provident funds for their proprietary deals. To widen its reach, access to NDS-OM was extended to certain entities maintaining gilt accounts with the NDS members (i.e., banks and PDs) through the Constituent SGL (CSGL) route in a phased manner and is now available to deposit-taking non-bank financial companies (NBFCs), provident funds, pension funds, mutual funds, insurance companies, cooperative banks, RRBs, trusts and systemically important non-deposit taking NBFCs (NBFCs-ND-SI). As proposed in the Annual Policy Statement of April 2008, access to NDS-OM through the CSGL route was further extended to investors such as other non-deposit taking NBFCs, corporates and FIIs. These entities can place orders on NDS-OM directly through NDS-OM members using the CSGL route. Such trades will settle through the CSGL accounts and current accounts of the NDS-OM members.

(iv) Clearing and Settlement of OTC Rupee Interest Rate Derivatives

139. The CCIL has operationalised a trade reporting platform for over-the-counter (OTC) rupee interest rate derivatives which has been functioning satisfactorily. The average daily turnover is currently about Rs.14,000 crore. It was announced in the Annual Policy of April 2008 that a clearing and settlement arrangement for OTC rupee interest rate derivatives would be put in place. Accordingly, permission has been given to the CCIL to operationalise a clearing and settlement arrangement for OTC rupee interest rate derivatives on a non-guaranteed basis and this is expected to commence within a month. Once the software systems are in place and the issues relating to counter-party exposure and risk weights as applicable to the CCIL are advised, the CCIL would operationalise settlement of these products on a guaranteed basis within three months.


I. Interest Rate Policy... Click Here For Full Text

III. Credit Delivery Mechanism and Other Banking Services... Click Here For Full Text

IV. Prudential Measures... Click Here For Full Text

V. Institutional Developments... Click Here For Full Text

Click here for Highlights of Mid-Term Review of the Annual Policy Statement

Click Here For Macroeconomic and Monetary Developments Mid-Term Review 2008-09

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