Second Quarter Review of Monetary Policy 2009-2010
-Announced on the 27th October 2009
Part B. Developmental and Regulatory Policies
III. Financial Markets
Financial Market Products
Interest Rate Futures
110. The Annual Policy Statement of April 2009 had indicated launching of exchange traded interest rate futures (IRFs) contracts on the 10-year notional coupon bearing Government of India bond. Accordingly, in consultation with the Securities and Exchange Board of India (SEBI), IRFs were introduced and the directions covering the framework for trading of IRFs on recognised exchanges were placed on the Reserve Bank’s website in August 2009. The National Stock Exchange (NSE) commenced trading in IRFs on August 31, 2009.
Introduction of Repo in Corporate Bonds
111. The Reserve Bank had placed on its website, on September 17, 2009, the draft guidelines on repo in corporate bonds for comments/feedback. The draft guidelines were also deliberated by the Technical Advisory Committee (TAC) on Money, Foreign Exchange and Government Securities Markets at its meeting held on September 23, 2009. With DvP-I (trade-by-trade) based clearing and settlement system for OTC trades in corporate bonds being operationalised by the clearing houses of the exchanges, repo in corporate bonds can now be introduced. Accordingly:
• final guidelines on repo in corporate bonds will be issued by end-November 2009.
Regulation of Non-Convertible Debentures (NCDs) of Maturity of Less than One Year
112. At present, issuance of non-convertible debentures (NCDs) with maturity of less than one year is not subjected to regulation by the SEBI or the Government of India. It was decided in the High Level Coordination Committee on Financial Markets (HLCCFM) that such instruments being ‘money market instruments’ needed to be brought under the regulation of the Reserve Bank. A Working Group with representation from the Reserve Bank and the SEBI was, therefore, set up to examine the issue. The Working Group, which has since submitted its Report, has recommended that the Reserve Bank may frame regulations on issuance of NCDs with maturity of less than one year, as they fall under the definition of ‘money market instruments’ of Chapter IIID of the Reserve Bank of India (Amendment) Act, 2006. The recommendations of the Working Group were discussed in the meeting of the TAC on Money, Foreign Exchange and Government Securities Markets on September 23, 2009 and it was agreed that the Reserve Bank may frame regulations on the lines of the guidelines for issuance of commercial paper (CP). Accordingly:
• draft guidelines are being formulated which will be placed on the Reserve Bank’s website by end-November 2009 for comments/suggestions.
Introduction of Credit Default Swaps (CDS)
113. In 2007, the Reserve Bank had issued draft guidelines for introduction of credit default swaps (CDS) in India. However, the issuance of final guidelines was kept in abeyance keeping in view the role of credit derivatives in the recent financial crisis. It was considered appropriate to proceed with caution reflecting the lessons from the financial crisis in this regard. In order to align with the international work already conducted/underway in the area of credit derivatives, and keeping in view the specifics of the Indian markets, it is proposed:
• to introduce plain vanilla OTC single-name CDS for corporate bonds for resident entities subject to appropriate safeguards. To begin with, all CDS trades will be required to be reported to a centralised trade reporting platform and in due course they will be brought on a central clearing platform.
114. The Reserve Bank is setting up an internal Group to finalise the operational framework in consultation with market participants.
Separate Trading for Registered Interest and Principal of Securities (STRIPS)
115. As indicated in the Annual Policy Statement of April 2009, the draft guidelines on stripping/reconstitution of government securities were placed on the Reserve Bank’s website on May 1, 2009 inviting comments/suggestions from market participants by May 29, 2009. Based on the feedback/suggestions received from the market participants, the guidelines have been finalised. Banks will be permitted to strip/reconstitute eligible securities held in their held to maturity (HTM)/available for sale (AFS)/held for trade (HFT) portfolios. Accordingly:
• STRIPS will be launched, as scheduled, during the current financial year.
Floating Rate Bonds (FRBs)
116. As announced in the Annual Policy Statement of April 2009, the issuance structure of floating rate bonds (FRBs) has been revised, addressing issues relating to product design. The FRBs will henceforth be issued by way of ‘price-based’ auction as against the earlier ‘spread-based’ auction. The revised issuance structure of FRBs has been built into the negotiated dealing system (NDS) auction platform, which was operationalised on May 11, 2009. Accordingly:
• floating rate bonds will be issued during the current financial year depending upon the market conditions and market appetite.
Expansion of Currency Pairs of Currency Futures Contracts
117. Currently, persons resident in India are permitted to trade in US dollar-Indian rupee (INR) currency futures contracts in three recognised stock exchanges. The combined average daily turnover of the contracts in all the three exchanges increased from US$ 1.1 billion in March 2009 to US$ 2.5 billion in September 2009. Market participants have been representing that trading of currency future contracts in other major currency pairs may also be permitted to facilitate direct hedging of their risk in such currencies. Accordingly, it is proposed:
• to permit the recognised stock exchanges to offer currency futures contracts in currency pairs of Euro-INR, Japanese Yen-INR and Pound Sterling-INR, in addition to US dollar-rupee contracts which are already permitted.
118. Necessary amendments to Currency Futures (Reserve Bank) Directions, 2008 are being made separately.
Guidelines on Forex, Commodity and Freight Derivatives
119. In light of the developments in the domestic and international financial markets and based on the feedback received from banks, market participants, industry associations and others, the existing guidelines on foreign exchange and commodity and freight derivatives overseas have been reviewed by an internal Group. The draft proposals were discussed in the meeting of the TAC on Money, Foreign Exchange and Government Securities Markets. Accordingly:
• the draft guidelines are being placed on the Reserve Bank’s website by end-November 2009 for wider dissemination and comments/views.
Financial Market Infrastructure
Revision of Repo Accounting
120. The Annual Policy Statement of April 2009 had indicated issuance of revised guidelines on repo accounting taking into account comments on the draft guidelines earlier placed on the Reserve Bank’s website for implementation from April 1, 2010. Accordingly:
• the final guidelines are under consideration and will be issued by end-November 2009.
Clearing and Settlement of OTC Trades in Corporate Bonds: Status
121. As announced in the Annual Policy Statement of April 2009, the clearing houses of the exchanges, viz., National Securities Clearing Corporation Limited (NSCCL) and Indian Clearing Corporation Limited (ICCL) have been permitted to maintain transitory pooling accounts with the Reserve Bank for facilitating settlement of OTC transactions in corporate bonds in the real time gross settlement (RTGS) system on a DvP-I basis (i.e., on a trade-by-trade basis). The Reserve Bank and SEBI have issued necessary instructions requiring specified regulated entities to clear and settle all OTC trades in corporate bonds through the NSCCL or ICCL with effect from December 1, 2009.
Refinance/Special Liquidity Facilities
122. As indicated in the Annual Policy Statement of April 2009, the following liquidity facilities provided by the Reserve Bank to banks and financial institutions are available up to March 31, 2010: (i) the export credit refinance (ECR) facility (limit up to 50 per cent of eligible outstanding rupee export credit) under Section 17(3A) of the Reserve Bank of India Act (RBI); (ii) the special refinance facility for scheduled commercial banks [limit up to one per cent of net demand and time liabilities (NDTL) as on October 24, 2008] under Section 17(3B) of the RBI Act; (iii) special term repo facility to scheduled commercial banks for funding to mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs) [limit is in terms of relaxation in the statutory liquidity ratio (SLR) up to 1.5 per cent of NDTL]; (iv) refinance facility to Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB) and Export- Import Bank of India (EXIM Bank) [under Section 17(4H), Section 17(4DD) and Section 17(4J), respectively, of the RBI Act]; and (v) the forex swap facility to banks for tenor up to three months.
123. A review of these facilities, indicated that the utilisation of these facilities has been low. Keeping this in view and taking into account the current liquidity conditions in the markets, it is proposed to take the following actions with immediate effect:
• to reduce the limit of export credit refinance facility from 50 per cent to 15 per cent of eligible outstanding rupee export credit extended under Section 17(3A) of the RBI Act;
• to discontinue the special refinance facility for scheduled commercial banks instituted under Section 17(3B) of the RBI Act;
• to discontinue the special term repo facility for scheduled commercial banks for funding to mutual funds, non-banking financial companies and housing finance companies; and
• to discontinue the forex swap facility of banks.
124. The refinance facility to SIDBI, NHB and EXIM Bank [under Section 17(4H), Section 17(4DD) and Section 17(4J), respectively, of the RBI Act] will continue to be in operation till the pre-announced date of March 31, 2010. However, these three financial institutions (FIs) will have to ensure that all outstandings are repaid by the close of business on March 31, 2010.
Government Securities Market
Auction Process of Government of India Securities: Status
125. As indicated in the Annual Policy Statement of April 2009, the specific notification for auction for sale of government securities along with the scheme for non-competitive bidding facility has been amended by the Government of India in consultation with the Reserve Bank. Accordingly, the remaining recommendations of the internal Working Group (Chairman: H.R. Khan) pertaining to the Reserve Bank such as: (i) withdrawal of the facility of bidding in physical form and submission of competitive bids only through the NDS; and (ii) submission of a single consolidated bid on behalf of all its constituents by the bank/primary dealer (PD) in respect of non-competitive bids, have been implemented with effect from May 22, 2009. The implementation of the recommendations of the Working Group has improved the efficiency of the auction process by reducing the time taken for announcement of the auction results, thereby enhancing the time available for trading in the auctioned securities.
Non-Competitive Bidding in the Auction of State Development Loans (SDLs): Status
126. In order to widen the investor base and enhance the liquidity for State Development Loans(SDLs), a scheme for non-competitive bidding in the auction of SDLs was notified by all State Governments on July 20, 2007. In pursuance of the announcement made in the Annual Policy Statement of April 2009, the scheme for non-competitive bidding in SDLs has been operationalised with effect from August 25, 2009. Under the scheme, up to 10 per cent of the notified amount of SDLs will be allotted to eligible individuals and institutions, subject to a maximum of one per cent of the notified amount for single bid per stock. An investor can submit only a single bid in an auction of SDL through a bank or PD.
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