Banks seek gilt-like status for market stabilisation bonds

Banks have sought parallel status for the bonds to be issued from the market stabilisation fund (MSF) on a par with government securities so as to make it a viable investment option.

In its recommendation to the Reserve Bank of India (RBI), the Fixed Income and Money Market Dealers' Association of India (FIMMDA) has proposed that these bonds should be made eligible for statutory liquidity ratio (SLR). Further, they should carry tenors ranging from three month to one year and not beyond it.

M S Annigeri, chief executive officer, FIMMDA, said these bonds are meant for market operations and not form part of government borrowing. Therefore, longer tenor will distort the yield curve with its pricing.

In sync with the earlier recommendation, FIMMDA has also suggested that banks' investment in stabilisation bonds should be kept out of the stipulation of investment fluctuation reserve (IFR).

This will act as an incentive for the banks to subscribe to these bonds and help the bonds to act as a substitute for overnight repos. The stabilisation bonds are expected to be floated by end of February.

Apart from the recommendation made by FIMMDA, banks have also proposed that the interest rate on special deposits to be taken by the RBI in excess of cash reserve ratio (CRR) as part of liquidity management should be pegged at one percentage point below the repo rate.

They have also asked for a reduction of the corridor of 250 basis points between interest rates for absorbing and injecting money from the market as suggested by the RBI in its paper on liquidity adjustment facility (LAF).

These recommendations are under consideration of the Reserve Bank which is in the process of submitting its detailed scheme for setting up of MSF to the government.

In December, the RBI had recommended setting up of market stabilisation fund (MSF) by the government to counter the problem of finite stock of government securities available with the RBI for sterilisation of excess dollar flow into the system.

The suggestion has been made in the light of the fact that the option of issuing central bank securities is neither permissible under the RBI Act nor it is considered desirable by the central bank.

This fund in turn was to issue a new instrument called market stabilisation bills/bonds (MSBs) for mopping up enduring surplus liquidity from the system over and above the amount that could be absorbed under the day to day repo operations of LAF.