`Primary Dealers Should Mobilise Term Money'

The Reserve Bank of India (RBI) cannot extend additional amount of liquidity support to primary dealers as and when there are aberrations in the short-term rates, since it translates into high-powered money, said Usha Thorat, chief general manager-internal debt management cell, RBI, at The Invest India Seminar yesterday.

Instead, the primary dealers should mobilise term money by the issue of say, commercial paper, and that, too, at times when the sentiment is easy, she suggested. Thorat said that primary dealers have to create a back stop facility to meet their liquidity requirements.

During the same session, K Rajgopal, deputy general manager at State Bank of India had urged the RBI to provide the PDs will liquidity support or concessional refinance facility in order to create depth in the secondary debt market and increase volumes.

 

Rajgopal also suggested urged that open market operations by the RBI should be used as a signalling tool rather than the cash reserve ratio. "RBI's open-market operations should be used to send the right signals at the right time. At times when the secondary market trading is out of sync with the yield curve, the RBI could come out with two way quotes," he suggested.

The development of a when-issued market was also engaging RBI's immediate attention, said Thorat. The issues to be examined were - the type of participants who could be allowed to short-sell, the kind of securities and the regulatory aspects involved, she said. Thorat accepted that clarity in settlement procedure, clearing and transaction costs were issues that had to be sorted to increase the number of players. "In fact FIIs are not trading in the debt market since they are worried about these issue more than forward cover risk," she said.

Rajgopal also suggested that for government securities there is need to have a trading guarantee corporation for maintaining clearing corporation which could be in line with National Securities Depository Corporation. This would ensure that the trade will be with less degree of counter party risk since most of the transaction in secondary debt market are telephonic trades.