Lending depth to the debt marts

MID-TERM REVIEW OF ANNUAL POLICY 2004-05/ IMPARTING FLEXIBILITY

The Reserve Bank of India (RBI) has spelt out a string of measures to increase the depth of the government securities and corporate debt market both in terms of introducing new instruments, diversifying the role of market players and enhancing settlement procedures through the intervention of third counterparty.

It proposes to introduce capital indexed bonds (CIB) in 2005-06, in consultation with the government. While the instrument was proposed in the annual policy statement, the RBI reiterated its stance on CIBs once again in the policy.

In this regard, market conventions for secondary market trading and settlement of bonds are being finalised in consultation with the Fixed Income Money Market and Derivatives Association of India and Primary dealers Association of India.

In addition to this, the RBI is also in evaluating the role of primary dealers (PDs) in government securities with particular emphasis on their obligation and ability to cope with emerging risk and diversification of their balance sheets.

The review is being made in line with the recommendation of the technical advisory committee of the RBI. The Clearing Corporation by India Ltd is expected to start implementation of celaring arrangement of over-the-counter (OTC) derivatives by March 2005.

The corporation is stated to have developed the pricing and risk models for this process since the time it received the " in principle" approval for OTC settlement.

Leaving aside the controversy over regulation of corporate debt market, the RBI has gone ahead by setting up a working group to further develop the coprorate debt market. The group has members from RBI, the Securities and Exchang Board of India, and other market participants.

The group has been mandated to examine issues relating to primary issuances as well as growth of secondary market, regulatory aspects for the development of asset-backed securities and mortgage-backed securities besides trading, settlement and accounting of corporate debt securities.

The RBI has also proposed to set up a study group for strengthening the open market operation framework so as to facilitate efficient intervention by RBI post-April 2006.

This is because as per the Fiscal Responsibility and Budget Management Act, RBI's participation in primary issues of government securitieswill stand withdrawn from April 1, 2006.

Consequently, OMO will become an active instrument warranting a review of processes and technological infrastructure consistent with market advancements as direct intervention of RBI or through PDs will become necessary.