Boost for derivatives, bonds

MONETARY POLICY 2007-08/ TOWARDS CONVERTIBILITY

The RBI has set up a working group to review the interest rate futures market.

The Reserve Bank of India has come up with a slew of measures to develop the market infrastructure by introducing new financial instruments both in bonds and derivatives markets.

The initiative comes at a time when the government has proposed an integrated bond, currency and derivatives market as a prelude to the Mumbai International Finance Centre.

To start with, the Clearing Corporation of India Ltd will start a reporting platform for rupee interest rate swaps which would be functional by August 31, 2007.

The RBI has indicated that repo facilities for corporate bonds will be allowed once the proposed trading platforms for bonds stabilise. Corporate bond repos will enhance the liquidity in bonds since these bonds could be pledged as collateral to arrange liquidity in line with government securities.

Further, the RBI has set up a working group to review the interest rate futures market in light of the new changes in the government securities market like the introduction of short selling and when-issued scheme, which facilitates price discovery before the auction.

In addition to this, another working group will look into operationalising the framework for currency futures. The decision has been triggered by enhanced market volumes of foreign exchange contracts and cross currency and rupee options which are increasingly being used by corporate as hedging instruments.

In order to simplify the methodology for pricing of the floating rate bonds, the RBI proposes to use the cut-off yield on the more frequently-traded 182 day t-bill as the benchmark rate instead of the 364-day t-bill. The central bank has also come out with modalities to make the market for state government securities more liquid.

While a general scheme has been formulated for buyback of state development loans, an indicative calendar for issuance of state development loans (SDLs) is in the process, which will help the market plan investments in such instruments in advance.

In order to encourage the retail market interest (provident funds, insurance companies and trusts) in the SDLs, the annual policy proposes to introduce non competitive bidding in SDL auctions in 2007-08. There will be continued reissuance of SDLs of same maturity to build up a critical mass and improve the secondary market liquidity.

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The Clearing Corporation of India Ltd will start a reporting platform for rupee interest rate swaps by August 31, 2007

The RBI has indicated that repo facilities for corporate bonds will be allowed once the proposed trading platforms for bonds stabilise

The RBI has set up a working group to review the interest rate futures market in light of changes in the securities market