RBI moves to curb bond trade by 3 foreign banks

The Reserve Bank of India (RBI) is set to clamp restrictions on at least three foreign banks for indulging in trade practices that distorted the price pattern of some government securities.

Sources familiar with the developments said three foreign banks with a significant presence in emerging markets are believed to have been informed by the central bank of an impending six-month ban on proprietary trading in government bonds.

The banks were alleged to have been involved in so-called “circular trading” in bonds. This involves buying and selling illiquid bonds amongst each other to move prices and volumes in a direction that their internal rules required.

This circular trading created a scare in the market, triggering a wider sale of the securities by other market participants. Such sales would depress prices, creating an opportunity for the banks to pick up these bonds at a lower price and higher yield.

The errant banks will, however, be allowed to continue to bid for RBI’s primary auctions – the open market operations -- and collateralised borrowing & lending operations, a source said. There was no immediate clarity on how long the circular trading had been going on or the trade value, the source added.

Business Standard sought the comments of Citigroup, Barclays and Standard Chartered on RBI’s move. While Citigroup and Barclays could not be reached, a spokesperson for Standard Chartered said the bank does not comment on market speculation.

Yields on government securities have been rising this year as RBI raised key policy rates six times since March to rein in rising inflation and dampen inflationary expectations. RBI on November 2 raised its repo rate by a quarter percentage point to 6.25 percent.

Yields on securities of maturity shorter than one year have risen far more sharply that those maturing in five years and longer.

RBI may not raise policy rates until January unless it has a compelling reason to do so, Governor D Subbarao said after presenting the monetary policy review on Tuesday.