Plan For Repos In All Securities Shelved
Repos are now permitted only on a limited basis -- in some dated government securities and treasury bills. Moreover, only a select category of banks and institutions, including DFHI -- those which have electronic reconciliation systems -- are allowed to transact repos. Repos in all other instruments stand banned. The ban was imposed in the wake of the securities scam of 1992. Senior finance ministry sources say RBI fears a repetition of the scam if resumption of repos in all kinds of securities is allowed.
Repos had actually been banned through a 1969 notification. But banks, both foreign and Indian, had ignored the notification and dealt in repos with impunity during the 1992 scam. Following the disclosures of the manner in which the bankers' receipts had been misused, the RBI slapped the ban by invoking the provisions of the notification.
Sources said the RBI feels no specific purpose would be served by reintroducing repos now since most banks adopted a cautious approach after the scam.
A large chunk of the dated government paper is already available for repos, and there is no need to widen the basket. If blanket permission for repos were to be given now, it might lead to speculative trading in securities.
The finance ministry earlier wanted the embargo on repos on many securities and institutions lifted to impart liquidity to the gilts market. This was expected to deepen the market for government securities and PSU bonds which, would reflect in the private debt market also. The debt market growth is hit by severe illiquidity arising out of few players.
The RBI has taken steps to deepen the market for government securities, mainly the decision to appoint primary dealers. Brokering in gilts among banks and institutions has however not taken off, since the dealers want the RBI to fund their entire broking activity, a proposition which the apex bank finds unacceptable.