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Click here to return to main page of Annual Policy Statement 2008-09

Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2008-09

I. Financial Markets

Government Securities Market

111. The Reserve Bank has taken significant steps to further broaden and deepen the Government securities market in consultation with market participants. In this direction, the following initiatives are proposed:

(a) Central Government Securities

(i) Floating Rate Bonds: Status

112. The Mid-Term Review of October 2007 had indicated that a new issuance structure for floating rate bonds (FRBs) is being built into the Negotiated Dealing System (NDS) auction format being developed by the Clearing Corporation of India Limited (CCIL) to simplify the methodology for pricing of FRBs in the secondary market. The CCIL is currently developing the primary auction module for the dated Government securities which would cover all types of instruments, including FRBs. The issuance of FRBs would be considered at an appropriate time, taking into account the market conditions.

(ii) Ways and Means Advances to the Government of India: Status

113. The Reserve Bank, in consultation with the Government of India, has retained the extant arrangements for the Ways and Means Advances (WMA) for the fiscal year 2008-09. As per the arrangements, the WMA limits would continue to be fixed on a half-yearly basis and are placed at Rs.20,000 crore for the first half and Rs.6,000 crore for the second half of 2008-09. The applicable interest rate on WMAs and overdrafts would continue to be linked to the repo rate, as hitherto. The Reserve Bank, however, retains the flexibility to revise the limits in consultation with the Government of India, taking into consideration the prevailing circumstances.

(iii) Auction Process of Government of India Securities

114. An Internal Working Group (Chairman: Shri H.R. Khan) was constituted to review the auction procedure for the Government securities and make suggestions to reduce the time taken for completion of the auction process with a view to improving efficiency on par with the best international practices. Some of the important recommendations made by 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; submission time for the non-competitive bids to be de-linked from that of competitive bids; competitive bids to be submitted only through the Negotiated Dealing System (NDS); and designing of a secured web system facilitating direct participation of non-NDS members in the auctions of Government securities. The modalities for implementing the recommendations of the Working Group are being worked out.

(iv) Restructuring of Primary Dealers' Activities: Status

115. Primary Dealers (PDs) were permitted in July 2006 to manage risks inherent in their business by diversifying into other business lines, i.e., corporate debt, money market, equity and securitisation instruments, subject to certain prudential limits, while retaining the requirement of predominance of Government securities business. They were also allowed to offer certain fee-based services. PDs, however, are not permitted to set up step-down subsidiaries in order to ensure that the balance sheets of the PDs do not get affected by the spillover of risks from other businesses/subsidiaries and that the regulation of PDs is focused on their primary dealership activities. In compliance with the guidelines, all the nine standalone PDs have restructured their operations for undertaking permissible activities.

(v) The Government Securities Act, 2006: Status

116. The Government Securities (GS) Act, 2006 was passed and was published in the Gazette of India on August 31, 2006 for general information. The Government Securities Regulations, 2007 were framed by the Reserve Bank in terms of Section 32(1) of the GS Act, which came into force from December 1, 2007. The main features of the Regulations include investor friendly automatic redemption facility, i.e., no physical discharge is required if the investors submit bank account details for receiving redemption proceeds of Government security held in the form of bond ledger account (BLA), subsidiary general ledger (SGL) or stock certificate; facility of pledge, hypothecation or lien of Government security; simplified procedure for recognition of title to a Government security of a deceased holder; nomination facility for stock certificate and BLAs; simplified procedure for issue of duplicate Government promissory note; and simplified procedure for making vesting order. For better customer service, it is proposed to widely disseminate these investor friendly features of the regulations through media publicity and the website of the Reserve Bank by way of easy to understand material and frequently asked questions (FAQs).

(b) Debt Management for State Governments

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

117. The Mid-Term Review of October 2007 indicated that a scheme for non-competitive bidding facility in the auctions of State Development Loans (SDLs) was incorporated in the Revised General Notification issued by all State Governments on July 20, 2007 with a view to widening the investor base and enhancing the liquidity of SDLs. The business requirement specification relating to this scheme has been incorporated in the dated securities auction module of the NDS auction which is being developed by the CCIL. The module is expected to become functional by September 2008.

(ii) Ways and Means Advances Limits of the States: Status

118. On a review of the State-wise limits of normal WMA for the year 2007-08, the Reserve Bank has kept these limits unchanged for the year 2008-09. Accordingly, the aggregate normal WMA limit for State Governments is placed at Rs.9,925 crore, including the WMA limit of Rs.50 crore for the Government of the Union Territory of Puducherry. Other terms and conditions of the Scheme remain unchanged.

(c) Development of Market Infrastructure

(i) Introduction of Interest Rate Futures

119. 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 presented to the Technical Advisory Committee (TAC) for Money, Foreign Exchange and Government Securities Markets and their suggestions/views were taken into consideration in the Group's report which has been placed on the Reserve Bank's website on March 3, 2008 for comments/suggestions. Action on the recommendations of the report would be initiated on the basis of the feedback received.

(ii) Separate Trading for Registered Interest and Principal of Securities

120. A Working Group (Chairman: Shri M.R. Ramesh) comprising banks and market participants was constituted to suggest guidelines in order to operationalise Separate Trading for Registered Interest and Principal of Securities (STRIPS) in Government securities. The Working Group submitted its report which was placed on the Reserve Bank's website for wider dissemination. An implementation group also examined the issue of operationalisation of STRIPS. With the enactment of the Government Securities Act, 2006 effective from December 1, 2007, it is proposed to introduce STRIPS in Government securities by the end of 2008-09. The activity of stripping/reconstitution of securities would be carried out on the Public Debt Office (PDO)-NDS platform.

(iii) Multi-modal Settlement

121. A new settlement mechanism in Government securities through settlement banks is being formulated in order to facilitate direct access of NDS and NDS-OM participants who do not maintain current accounts but maintain SGL accounts with the Reserve Bank. This new system would facilitate phasing out of current accounts of non-banks and non-PD entities with the Reserve Bank. The CCIL has developed the required software changes and has also entered into arrangements with three banks to function as settlement banks for the present. The new arrangement is expected to be operationalised in May 2008.

(iv) NDS-OM: Extension of Access through the CSGL Route

122. Access to the order matching segment on NDS (NDS-OM), which was launched in August 2005, was initially allowed to commercial banks and primary dealers and later to other NDS members such as insurance companies, mutual funds and large provident funds for their proprietary deals. Access to NDS-OM was extended to other entities maintaining gilt accounts with NDS members, i.e., banks and PDs through the Constituents’ Subsidiary General Ledger (CSGL) route from May 2007. Initially, permission was accorded to deposit-taking NBFCs, provident funds, pension funds, mutual funds, insurance companies, cooperative banks, RRBs and trusts. With effect from November 2007, the facility has also been extended to the systemically important non-deposit taking NBFCs (NBFCs-ND-SI). These entities can place orders on NDS-OM through direct NDS-OM members, i.e., banks and PDs, using the CSGL route. Such trades are settled through the CSGL account and current account of the NDS-OM members.

123. Certain segments of investors such as other non-deposit taking NBFCs, corporates and FIIs do not have access to NDS-OM through the CSGL route. In the light of requests received, it is proposed:

to allow these participants also to access the NDS-OM through the CSGL route.

(v) Clearing and Settlement of OTC

Rupee Interest Rate Derivatives

124. It was announced in the Annual Policy Statement of May 2004 that a clearing and settlement arrangement through the CCIL was being considered to strengthen the over-the-counter (OTC) derivatives market and mitigate the risks involved. With some of the underlying issues having been addressed with the enactment of the Payment and Settlement Systems Act, 2007 a clearing and settlement arrangement for OTC rupee derivatives is proposed to be put in place. The modalities for operationalising the clearing and settlement system for the OTC rupee interest rate derivatives would be worked out in consultation with the CCIL.

(d) Repo in Corporate Bonds

125. Most of the recommendations of the High Level Committee on Corporate Bonds and Securitisation (Chairman: Dr. R.H. Patil) have been taken up for implementation. The Union Budget, 2008-09 has abolished tax deduction at source (TDS) on corporate bonds. The trading platforms started by the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have now been in operation since July 2007. The Fixed Income Money Market and Derivatives Association of India (FIMMDA) trade reporting platform for capturing the OTC trade data has also been operational since September 2007.

126. These initiatives will ensure development of a healthy secondary market once there is adequate incentive for more public issuances and listing. The Securities and Exchange Board of India (SEBI) is in the process of simplification of the issuance procedures and rationalisation of the listing norms for corporate bonds.

127. As indicated in the Mid-Term Review of October 2007, introduction of repo in corporate bonds would be considered once the prerequisites viz., efficient price discovery through greater public issuances and secondary market trading, and an efficient and safe settlement system based on Delivery versus Payment (DvP) III and Straight Through Processing (STP) are met.

Foreign Exchange Market

128. Measures towards further liberalisation and improvement of foreign exchange facilities are set out below.

(a) Expansion of Hedging Facilities

129. With a view to facilitating domestic crude oil refining companies to hedge their commodity price risk exposures, it is proposed to:

permit domestic crude oil refining companies to hedge their commodity price risk on domestic purchase of crude oil and sale of petroleum products on the basis of underlying contracts which are linked to international prices on overseas exchanges/markets.

permit domestic crude oil refining companies to hedge their commodity price risk on crude oil imports in overseas exchanges/markets on the basis of their past performance up to 50 per cent of the volume of actual imports during the previous year or 50 per cent of the average volume of imports during the previous three financial yeas, whichever is higher. The companies will have to ensure regularisation of the contracts booked under this facility by production of supporting import orders during the currency of the hedge.

(b) Introduction of Currency Futures

130. The draft report of the Internal Working Group on Introduction of Currency Futures in India (Chairman: Shri Salim Gangadharan) was placed on the Reserve Bank's website on November 16, 2007. The comments received from the public, banks, market participants, academicians and the Government of India were discussed in the meetings of the TAC on Money, Foreign Exchange and Government Securities Markets. Taking into account the feedback and expert views of the TAC, the report has been finalised and has been placed on the Reserve Bank's website on April 28, 2008. An RBI-SEBI Standing Technical Committee has been set up to advise on operational aspects in regard to trading of currency futures on exchanges. In consultation with the SEBI, it has been decided that currency futures will be introduced in the eligible exchanges and the broad framework is expected to be finalised by the end of May 2008.

(c) Overseas Direct Investment

131. With a view to further liberalising the policy on overseas investment, it is proposed:

to allow Indian companies to invest overseas in energy and natural resources sectors such as oil, gas, coal and mineral ores in excess of the current limits with the prior approval of the Reserve Bank.

(d) Capitalisation of Export Proceeds

132. In order to rationalise the policy on capitalisation of outstanding exports and to align it with the export-import policy, it is proposed that:

Indian parties may now approach the Reserve Bank for capitalisation of export proceeds for exports outstanding beyond the prescribed period of realisation.

(e) Liberalisation of Settlement of Claims Relating to Export Bills

133. In order to liberalise further the procedures relating to settlement of claims in respect of export bills, it is proposed to permit authorised dealer (AD) banks to write off, in addition to claims settled by the Export Credit Guarantee Corporation of India (ECGC), the outstanding export bills settled by other insurance companies which are regulated by the Insurance Regulatory Development Authority (IRDA). Accordingly, AD banks shall henceforth, on an application received from the exporter, supported by documentary evidence from the ECGC/insurance companies confirming that the claim in respect of the outstanding bills has been settled and that the export incentives, if any, have been surrendered, write off the relative export bills.

(f) Liberalisation of the Period for Realisation and Repatriation of Export Proceeds

134. At present, exporters are required to realise and repatriate to India the full export value of goods or software exported within six months from the date of export. Exporters who have been certified as `Status Holder' in terms of Foreign Trade Policy, 100 per cent Export-Oriented Units (EOUs) and units set up under Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Biotechnology Parks (BTPs) Schemes are permitted to realise and repatriate the full value of export proceeds within a period of 12 months from the date of export. Where the goods or software are exported by the units in the Special Economic Zones (SEZs), the stipulation of the period of realisation and repatriation to India of the full export value of goods or software is not applicable. Requests have been received to extend the period of realisation of exports proceeds in view of the external environment. It is, therefore, proposed in consultation with the Government of India:

to enhance the present period for realisation and repatriation to India of the full export value of goods or software exported from six months to twelve months from the date of export, subject to review after one year.

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