Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2005-06
II. Financial Markets
Framework for Development of Money Market
72. Money market provides a focal point for the central banks operations in influencing system liquidity and thereby transmitting the monetary policy impulses. The broad policy objectives that are being pursued for the development of money market include ensuring stability in short-term interest rates, minimising default risk and achieving a balanced development of various segments of the money market. In order to review the recent developments and current status of money market in the context of evolving monetary policy framework, fiscal scenario, regulatory regime and extent of financial integration, both domestic and external, a Technical Group on Money Market was constituted. The Report of the Group was discussed in the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets (TAC) and certain recommendations have been accepted for implementation. Accordingly, the following measures are proposed:
(i) Call/Notice/Term Money Market
With effect from the fortnight beginning June 11, 2005, non-bank participants, except PDs, would be allowed to lend, on average in a reporting fortnight, up to 10 per cent of their average daily lending in call/notice money market during 2000-01.
With effect from August 6, 2005, non-bank participants, except PDs, would be completely phased out from the call/notice money market.
With effect from the fortnight beginning April 30, 2005, the benchmark for fixing prudential limits on exposures to call/notice money market in the case of scheduled commercial banks would be linked to their capital funds (sum of Tier I and Tier II capital).
From April 30, 2005, all NDS members are required to report their term money deals on NDS platform.
A screen-based negotiated quote-driven system for all dealings in call/notice and term money market transactions is proposed.
(ii) Market Repo
An electronic trading platform for conduct of market repo operations in government securities, in addition to the existing voice based system, to be facilitated.
Participation in market repo facility in government securities for non-scheduled urban co-operative banks (UCBs) and listed companies having gilt accounts with scheduled commercial banks will be allowed subject to eligibility criteria and safeguards.
(iii) Certificates of Deposit
The minimum maturity period of certificates of deposit (CDs) reduced from 15 days to 7 days with immediate effect.
73. The Report of the Group is being placed on RBI website for wider dissemination. The recommendations of the Group on introduction of asset-backed commercial paper (ABCP) to further deepen the CP market and additional intra-day LAF to stabilise short-term interest rates would be considered in future in consultation with market participants. In addition, optionalities in OTC rupee derivatives would be considered, once legal clarity to OTC derivatives is provided and appropriate accounting standards are put in place.
Government Securities Market
(a) Central Government Securities Market: Medium-term Framework
74. In terms of the stipulation of FRBM Act, RBI will not be participating in primary issuance of government securities with effect from April 1, 2006. In this context, the mid-term Review of October 2004 emphasised that open market operations (OMO) would become a more active policy instrument necessitating review of processes and technological infrastructure consistent with market advancement. In order to address these emerging needs and equip RBI as well as the market participants appropriately, a Technical Group on Central Government Securities Market was constituted. Earlier, another Group (Chairman: Dr.R.H. Patil) had examined the role of primary dealers (PDs) in the government securities market. The Reports were discussed in TAC and certain recommendations have been accepted for implementation. Accordingly, the following measures are proposed:
The number of actively traded securities need to be enlarged to enhance liquidity and improve pricing in the market. It is proposed to consolidate debt and build up large liquid securities in consultation with the Government while continuing the programme of reissuances.
Post-FRBM, RBI will reorient government debt management operations while simultaneously strengthening monetary operations. This will entail functional separation between debt management and monetary operations within RBI. For this purpose, RBI will have discussions with market players on the modalities and procedures of market operations.
The settlement system for transactions in government securities will be standardised to T+1 basis.
The Reserve Bank would continue to resort to multiple and uniform price methods flexibly in the auction of government securities.
Permitted structures of PD business will be expanded to include banks which fulfil certain minimum criteria subject to safeguards and in consultation with banks, PDs and the Government.
75. The recommendations of the Technical Group on restructuring the underwriting obligations of PDs, allowing PDs exclusivity in primary auctions, introduction of When Issued Market and limited short selling in government securities would be considered in consultation with the Government.
(b) Sale of Government Securities: Relaxation
76. At present, sale of government securities allotted in primary issues can be entered into on the same day only between entities maintaining SGL account with RBI. In order to facilitate further deepening of the government securities market, it is proposed:
To permit sale of government securities allotted in primary issues with and between CSGL account holders also on the same day.
(c) Market Borrowings of State Governments
77. The Twelfth Finance Commission (TWFC) recommended that the Centre should not act as a financial intermediary for future lending to the States. The Centre would release only the grant portion of central assistance of state plan to States and allow them to approach the market directly to raise the loan portion of the funds. In case some fiscally weak States are unable to raise funds from the market, the Centre could borrow for on-lending to such States. The Centre has accepted in principle the recommendations and has proposed to implement it in phases, in consultation with RBI. As the implementation of the recommendations of TWFC would have major implications for the market borrowing programmes, RBI would facilitate smooth transition of the process in consultation with the Central and the state governments. As a first step, consultations were held with State Finance Secretaries on April 8, 2005.
Foreign Exchange Market
(a) Forex Market Group: Medium-term Framework
78. Since the onset of reforms in the early 1990s, significant liberalisation of the foreign exchange market has taken place and the process gained momentum after Sodhani Committee recommendations were accepted for implementation by RBI. The foreign exchange market is now deeper and wider as gauged in terms of parameters such as the range of products, participation, liquidity and turnover. As indicated in the mid-term Review of October 2004, an internal Group was set up to review comprehensively the initiatives taken by RBI in the foreign exchange market and identify areas for further improvements. The Group reviewed forex market liberalisation in select emerging markets and examined the current regulatory regime in the light of liberalisation in related sectors to identify areas for further liberalisation. The Report of the Group was discussed in TAC. As recommended by the Group, the following measures are proposed:
Cancellation and rebooking of all eligible forward contracts booked by residents, irrespective of tenor, to be allowed.
Banks to be allowed to approve proposals for commodity hedging in international exchanges from their corporate customers.
The closing time for inter-bank foreign exchange market in India to be extended by one hour up to 5.00 p.m.
Dissemination of additional information including traded volumes for derivatives such as foreign currency-rupee options to the market.
79. The other recommendations of the Group pertaining to writing of covered options by corporates and 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 would be considered. The sequencing with regard to implementation of these measures will take into account the enabling conditions for further progress towards capital account convertibility, liberalisation in other sectors of the economy and the trend in overall balance of payments.
(b) Overseas Investment: Liberalisation
80. At present, under the automatic route, Indian entities are permitted to invest in overseas joint ventures and/or wholly owned subsidiaries up to 100 per cent of their net worth. With a view to promoting Indian investments overseas, it is proposed:
To raise the ceiling of overseas investment by Indian entities in overseas joint ventures and/or wholly owned subsidiaries from 100 per cent to 200 per cent of their net worth under the automatic route.
(c) Foreign Currency Accounts by Foreign Companies in India: Liberalisation
81. At present, authorised dealers (ADs) are required to obtain RBI approval for opening of foreign currency accounts of the project offices set up in India by foreign companies. In order to further liberalise the procedure, it is proposed:
To accord general permission to ADs to open foreign currency accounts of the project offices set up in India by foreign companies and operate the accounts flexibly.
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