New issuance structure to aid valuation

MONETARY POLICY MID-TERM REVIEW 2007-08/ MARKETS

The RBI has proposed a new issuance structure for floating rate bonds (FRBs) to be issued to the banks, which is to be outlined later.

Dealers feel the RBI move could help in simplifying the methodology for pricing of FRBs in the secondary market as valuing them is cumbersome. Dealers also said that the move was positive as the interest rate scenario remains uncertain.

Usually, FRBs are floated if the issuer (in this case, the government) feels that the interest rate has peaked and rates should soften sooner or later. The investors subscribe to the bonds if they feel the interest rates are likely to remain high.

This new issuance structure has been approved by the RBI's technical advisory committee on money, government securities and foreign exchange markets.

The structure will be built into the new negotiated dealing system (NDS) auction system being developed by the Clearing Corporation of India (CCIL). CCIL is expected to complete the project by March 31, 2008.

The policy has also suggested various measures for developing the market for state government securities.

Till now, state government bonds were sold at a fixed interest rate. The RBI proposes to operationalise the auctioning of state development loans (SDLs), albeit on non-competitive bidding scheme.