Annual Monetary Policy Statement for the Year 2011-12- 3rd May 2011
Part B. Development and Regulatory Policies
III. Financial Markets
Financial Market Products
Interest Rate Futures
76. It was indicated in the Second Quarter Review of November 2010 that exchange traded interest rate futures (IRFs) on 5-year and 2-year notional coupon bearing central government securities and 91-day Treasury Bills would be introduced after taking into account the experiences of cash-settled IRF regimes in other countries. The IRF trading on 91-day Treasury Bills with cash settlement in Indian Rupees was permitted by the Reserve Bank in March 2011. The guidelines for 5-year and 2-year IRFs are being finalised in consultation with the Securities and Exchange Board of India (SEBI).
Introduction of Credit Default Swaps
77. It was announced in the Second Quarter Review of October 2009 to introduce plain vanilla over-the-counter (OTC) single-name credit default swap (CDS) for corporate bonds for resident entities, subject to appropriate safeguards. Consequently, an internal Working Group was constituted to finalise the operational framework in consultation with market participants. The final report of the internal Working Group and draft guidelines on CDS were placed on the Reserve Bank’s website in February 2011 for public comments. The guidelines are being finalised, based on feedback from the public, extensive consultations with the stakeholders and deliberations in the Technical Advisory Committee on Financial Markets. Accordingly, it is proposed:
to issue the final guidelines on plain vanilla single-name CDS for corporate bonds for resident entities, after taking into consideration the feedback/suggestions received from market participants, by end-May 2011.
78. The product will be launched once the necessary market infrastructure is in place.
Review of Short Sale in Government Securities
79. Based on the recommendations of the Technical Group on the Central Government Securities Market, intra-day short selling in central government securities was permitted in February 2006. Subsequently, based on the feedback received, the period of short sale was extended to five days in January 2007. With a view to providing a fillip to the IRF market and the term repo market, it is proposed:
to extend the period of short sale from the existing five days to a maximum period of three months.
Extension of DvP III Facility to Gilt Account Holders
80. Consequent upon the announcement made in the Mid-term Review of Monetary and Credit Policy for the year 2003-04, the settlement of transactions in government securities through Clearing Corporation of India Ltd. (CCIL) was switched over to delivery versus payment (DvP) III mode with effect from April 2, 2004. However, the DvP III mode of settlement was not extended to gilt account holders who maintained their balances with the custodian bank/primary dealer who, in turn, held these securities in its constituent subsidiary general ledger (CSGL) account with the Reserve Bank. With the stabilisation of the transaction and settlement infrastructure, it is now proposed:
to extend DvP III facility to transactions by the gilt account holders (excluding transactions between the gilt account holders of the same custodian) so that the gilt account holders get the benefit of efficient use of funds and securities.
81. Detailed guidelines in this regard will be issued shortly.
Guidelines on Over-the-Counter Forex Derivatives
82. It was proposed in the Second Quarter Review of November 2010 to issue final guidelines on OTC foreign exchange derivatives by end-November 2010. Accordingly, comprehensive guidelines on OTC foreign exchange derivatives and overseas hedging of commodity price and freight risks were issued in December 2010. The important elements of the revised guidelines, which became effective February 1, 2011, are (i) allowing embedded cross currency option in the case of foreign currency-rupee swaps; and (ii) permitting use of cost reduction structures, both under the contracted exposures and past performance routes, subject to certain safeguards.
Cancellation and Rebooking under the Portfolio Investment Scheme by FIIs
83. Currently, foreign institutional investors (FIIs) are permitted to cancel and rebook 2 per cent of the market value of the portfolio as at the beginning of the financial year. In view of the large positions held by the FIIs and considering the increased depth of the Indian forex market to absorb the impact on the exchange rate, it is proposed :
to allow FIIs to cancel and rebook up to 10 per cent of the market value of the portfolio as at the beginning of the financial year.
84. Detailed guidelines in this regard will be issued separately.
Facilitating Rupee Trade – Hedging Facilities for Non-resident Entities
85. The provisions under the Foreign Exchange Management Act (FEMA), 1999 do not permit non-residents to hedge their currency exposure with authorised dealer (AD) banks in India, in respect of exports and imports invoiced in Indian Rupees. In order to facilitate greater use of Indian Rupee in trade transactions, it is proposed:
that in respect of exports and imports invoiced in Indian Rupees, non-resident importers and exporters can hedge their currency risk with AD banks in India through their bankers having Rupee vostro accounts in India. The contracts would be on a deliverable basis.
86. The operational details will be finalised and notified in consultation with the stakeholders.
Financial Market Infrastructure
Committee for Review of Procedures relating to Facilities to Individuals – Residents/NRIs and PIOs
87. The Reserve Bank recognises the need for facilitating genuine foreign exchange transactions by individuals – residents/non-resident Indians (NRIs) and persons of Indian origin (PIOs) – under the current regulatory framework of FEMA. Keeping this in view, a Committee (Chairperson: Smt. K.J. Udeshi) comprising the representatives of various stakeholders has been set up. The Committee will identify areas for streamlining and simplifying the procedure so as to remove the operational impediments, and assess the level of efficiency in the functioning of authorised persons, including the infrastructure created by them. The Committee is expected to submit its report within three months.
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