Annual Policy Statement for the Year 2009-10- 21st April 2009
Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2009-10
III. Financial Markets
(a) Special Refinance Facility: Extension
89. A special refinance facility was introduced on November 1, 2008 under Section 17(3B) of the Reserve Bank of India Act, 1934 to provide funding to scheduled commercial banks (excluding regional rural banks) up to 1.0 per cent of their net demand and time liabilities (NDTL) as on October 24, 2008 at the repo rate. It is proposed:
• to extend this special refinance facility up to March 31, 2010.
(b) Special Term Repo Facility: Extension
90. The Reserve Bank introduced a special 14-day term repo facility for banks in September 2008 through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL, to enable them to meet the liquidity requirements of mutual funds (MFs), non-banking financial companies (NBFCs) and housing finance companies (HFCs). The auctions for the special 14-day term repo are conducted on a daily basis. On a review, it is proposed:
• to extend the time for availability of this special term repo facility to banks up to March 31, 2010;
• to conduct these 14-day term repo auctions on a weekly basis.
(c) Export Credit Refinance: Review
91. With a view to providing flexibility in the liquidity management of banks, the limit of the standing liquidity facility to banks in terms of export credit refinance (ECR) under Section 17(3A) of the RBI Act was raised from 15.0 per cent of the eligible outstanding rupee export credit as on the preceding fortnight to 50.0 per cent in November 2008. It is proposed:
• to review the ECR limit in March 2010.
(d) Money Market Mutual Funds
92. The liquidity stress recently faced by mutual funds, particularly the money market mutual funds (MMMFs), was caused primarily on account of mobilisation of significant resources from large corporates and banks with redemption facilities on par with current accounts of banks. In this regard, the Securities and Exchange Board of India (SEBI) has taken several measures to mitigate the liquidity risks. In view of the systemic implications of the activities of such funds, it is proposed:
• to identify and address the macro-prudential concerns arising from the current framework in consultation with SEBI.
(e) Interest Rate Futures
93. The Technical Advisory Committee (TAC) for Money, Foreign Exchange and Government Securities Markets had released the report of the Working Group on Interest Rate Futures (Chairman: Shri V. K. Sharma) in August 2008. The Working Group had recommended, inter alia, the introduction of a physically settled contract based on a 10-year notional coupon bearing government bond. The Reserve Bank has already permitted banks to take trading positions in interest rate futures (IRFs). The RBI-SEBI Standing Technical Committee has completed the preparatory work and an exchange traded IRFs contract on the 10-year notional coupon bearing government bond is expected to be launched shortly.
Government Securities Market
(a) Central Government Securities
(i) Floating Rate Bonds
94. The floating rate bonds (FRBs) issued by the Government of India till September 2004 were linked to the cut-off yields of the 364-day Treasury Bills (TBs), which led to certain issues relating to the pricing of FRBs in the secondary market. Reflecting this experience and in consultation with market participants and the Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets, the structure has been revised. The revised structure contemplates that: (i) the auction will be conducted through the ‘price based’ process as against the ‘spread based’ process earlier; and (ii) the base yield for FRBs will be linked to the primary market cut-off yield of the 182-day TBs. The revised structure is expected to simplify the methodology for pricing of FRBs in the secondary market. The revised issuance structure for FRBs has been built into the negotiated dealing system (NDS) auction format being developed by the Clearing Corporation of India Limited (CCIL).
95. The indicative calendar for the issuance of Central Government securities provides for the issuance of FRBs. Accordingly:
• any new issuance of floating rate bonds would be in terms of the revised issuance structure.
(ii) Auction Process of Government of India Securities
96. As indicated in the Mid-Term Review of October 2008, the recommendations of the Internal Working Group (Chairman: H.R. Khan) involving the Reserve Bank such as reduction of the time gap between bid submission and declaration of auction results have already been implemented. The other recommendations of the Working Group 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 will be implemented after the amendments in the specific notification and in the scheme for non-competitive bidding facility by the Government of India.
(iii) Ways and Means Advances to the Government of India: Status
97. The Reserve Bank, in consultation with the Government of India, has revised the extant limits for the Ways and Means Advances (WMA) for the financial year 2009-10. As per the revised arrangements, the WMA limits will continue to be fixed on a half-yearly basis, and are placed at Rs.20,000 crore for the first half and Rs.10,000 crore for the second half of 2009-10. The applicable interest rate on WMAs and overdrafts will, as it is the practice now, continue to be linked to the repo rate. The Reserve Bank of India, however, retains the flexibility to revise the limits in consultation with the Government of India, taking into consideration the prevailing circumstances.
(b) Debt Management for State Governments
(i) Non-Competitive Bidding in the Auction of State Development Loans (SDLs): Status
98. In order to widen the investor base and enhance the liquidity for SDLs, a scheme for non-competitive bidding in the auction of SDLs was notified by all the State Governments on July 20, 2007. Subsequent to the announcement in the Mid-Term Review of October 2008, the necessary system changes required to handle non-competitive bidding in the auction of SDLs have been carried out in the NDS auction platform developed by the CCIL.
99. The scheme for non-competitive bidding in SDLs will be operationalised during the current financial year.
(ii) Ways and Means Advances Limits for the State Governments: Status
100. The State-wise limits of normal WMA for the year 2009-10 have been kept unchanged at the limits set 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. All other terms and conditions of the scheme remain unchanged.
(c) Development of Market Infrastructure
(i) Separate Trading for Registered Interest and Principal of Securities (STRIPS)
101. Stripping is the process of converting periodic coupon payments and the principal of an existing Government security into tradable zero-coupon securities, i.e., separate trading for registered interest and principal of securities (STRIPS). The availability of STRIPS across the term structure will aid the development of a sovereign zero-coupon yield curve. As indicated in the Annual Policy Statement of April 2008, all operational arrangements for the introduction of STRIPS are ready. The required software development, critical for the introduction of STRIPS, has been carried out as part of the public debt office – NDS (PDO-NDS) platform maintained by the Reserve Bank. Furthermore, in order to ensure sufficient volume/liquidity in STRIPS and considering the fungibility of coupon STRIPS, securities have been identified that will be eligible for stripping/reconstitution by the market participants. Accordingly:
• draft guidelines prepared in consultation with the market participants are being placed on the Reserve Bank’s website for comments and feedback by end-May 2009. With the finalisation of the guidelines, STRIPS will be launched during the current financial year.
(ii) Revision of Repo Accounting
102. The accounting norms on repo transactions prescribed by the Reserve Bank in 2003, treated repo as a set of two independent outright transactions. Consequent upon the amendment in 2006 to the Reserve Bank of India Act, 1934, repo has been defined as an instrument for borrowing funds by selling securities. Accordingly, it was proposed to revise the accounting guidelines to capture the economic essence of repo as a collateralised lending and borrowing instrument and not as outright sale and purchase. Accordingly, it is proposed:
• to issue revised guidelines on repo accounting, taking into account comments on the draft guidelines earlier placed on the Reserve Bank’s website, by end-June 2009 for implementation from April 1, 2010.
(iii) Multi-modal Settlements in Government Securities: Status
103. As indicated in the Annual Policy Statement of April 2008, a new settlement mechanism (Multi-modal Settlement) through commercial banks has been put in place to facilitate entities such as mutual funds (MFs), which do not hold a current account with the Reserve Bank, to directly participate in the government securities market. Under the new mechanism, while settlement of the securities leg continues to take place in the SGL account maintained with the Reserve Bank, the funds leg will settle through the ‘designated settlement banks’ (DSBs) appointed by the CCIL. The guidelines in the matter were issued on June 2, 2008. From June 30, 2008 onwards, secondary market transactions in government securities undertaken by MFs are being settled only through this mechanism.
104. The facility of multi-modal settlements can also be availed of by other non-bank entities such as insurance companies, pension funds and co-operative banks which do not maintain a current account with the Reserve Bank.
(iv) Clearing and Settlement of OTC Rupee Interest Rate Derivatives: Status
105. As indicated in the Mid-Term Review of October 2008, the CCIL has operationalised a clearing and settlement arrangement for over-the-counter (OTC) rupee interest rate derivatives on a non-guaranteed basis since November 27, 2008. As at end-March 2009, 13 members have decided to participate in the non-guaranteed settlement of OTC rupee interest rate derivatives. The trade reporting platform for OTC rupee interest rate derivatives is already functional.
(v) Settlement of OTC Trades in Corporate Bonds
106. For facilitating settlement of OTC corporate bond transactions in real-time gross settlement (RTGS) system on a DvP-I basis (i.e., on a trade-by-trade basis), it has been decided, in consultation with the SEBI, to allow the clearing houses of the exchanges to have a transitory pooling account facility with the Reserve Bank. Under the proposed settlement mechanism, the buyer of securities will transfer the funds through his bank to this transitory account through RTGS. The clearing house will thereafter transfer the securities from the seller’s account to the buyer’s account and effect the release of funds from the transitory account to the seller’s account.
Foreign Exchange Market
(a) ECBs: Extension of Relaxation of all-in-cost Ceilings
107. As per extant ECB policy, the all-in-cost ceilings for ECBs are: LIBOR plus 300 bps for ECBs with average maturity period of three years and up to five years; and LIBOR plus 500 bps for ECBs with average maturity of more than five years. However, these all-in-cost ceilings have been dispensed with up to June 30, 2009 subject to the condition that ECB proposals above the prescribed all-in-cost ceilings, irrespective of the amount of the borrowing, will come under the approval route. Considering the continuing tightness of credit spreads in the international markets, it is proposed:
• to extend the relaxation in all-in-cost ceilings until December 31, 2009.
(b) Liberalisation of the Policy on Buyback of FCCBs
108. Recognising the benefits accruing to the Indian companies as well as to the economy, the policy on the premature buyback of FCCBs was liberalised in December 2008. The proposals for buyback of FCCBs by Indian companies are being considered both under the approval and automatic routes, provided buyback is financed out of their foreign currency resources held in India or abroad and/or out of fresh ECBs raised in conformity with the current ECB norms and out of internal accruals up to US $ 50 million of the redemption value per company. The entire procedure for buyback of FCCBs is required to be completed by December 31, 2009 and details of the buyback are also required to be reported to the Reserve Bank.
109. In terms of the extant norms, the Reserve Bank has been considering, under the approval route, proposals from Indian companies for buyback of FCCBs, out of internal accruals, up to US $ 50 million redemption value per company, at a minimum discount of 25 per cent on the book value. Up to April 15, 2009, the Reserve Bank has approved 18 proposals for buyback of FCCBs involving US $ 765 million with the discount ranging from 25 per cent to 50 per cent.
110. The current policy has been reviewed. Keeping in view the benefits accruing to Indian companies, it is proposed to increase the total amount of permissible buyback, out of internal accruals, from US$ 50 million of the redemption value per company to US $ 100 million, by linking the higher amount of buyback to larger discounts. Accordingly:
• Indian companies may, henceforth, be permitted, under the approval route, to buy back FCCBs out of internal accruals with a minimum discount of 25 per cent of book value for redemption amount of up to US $ 50 million, 35 per cent of book value for redemption amount more than US $ 50 million and up to 75 million; and 50 per cent of book value for redemption amount more than US $ 75 million and up to US $ 100 million.
(c) Loans against Non-resident Deposits
111. As per the extant norms, Authorised Dealer Category–I and authorised banks are permitted to grant loans up to Rs.20 lakh against the security of funds held in NR(E)RA and FCNR(B) deposits. On a review, it is proposed:
• to enhance the cap of Rs.20 lakh to Rs.1 crore with immediate effect.
(d) Currency Futures
112. Since the launch of the first currency futures exchange in September 2008, currency futures contracts are being traded in three recognised exchanges. The average daily volume of currency futures contracts traded on all the exchanges increased from Rs.260 crore in September 2008 to Rs.2,181 crore in December 2008 and further to Rs.5,235 crore in March 2009. The functioning of the exchanges continues to be reviewed by the RBI-SEBI Standing Technical Committee. On the recommendation of the Committee, the position limits on the clients and trading members have been doubled from US $ 5 million and US $ 25 million respectively to US $ 10 million and US $ 50 million. However, the upper limits of 6 per cent and 15 per cent of the total open interest on the clients and trading members remain unchanged. The position limit for banks continues at 15 per cent of total open interest or US $ 100 million, whichever is higher.
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