...Via The Markets

For the money and gilts markets, perhaps the most important issue is of the RBI washing its hands off the governments borrowing programme. With the system of underwriting-based commissions to primary dealers (PDs) already in place, it is only a small step before the RBI places the entire responsibility of pricing gilt yields on the PDs. In fact, the government borrowing exercise can be expected to be converted into a private placement with PDs, with the latter placing the paper in the retail market through a modified book building route. While earlier, the RBI used to dictate its view on the emerging yield curve by taking a devolvement upon itself rather than letting yields go off tangent, such externalities will no longer have a bearing on the market. Short term movements in the liquidity position in the system will also fail to impact the pricing of risk free paper. As a consequence, overall interest rates will be prone to lesser fluctuations.

 

The forex markets, perhaps, have to gear up for a period of turbulence ahead. While even the first few tentative steps towards implementing the report will lead to greater confidence in the rupee, larger inflows will exert upward pressure on its nominal value. The only option available to the RBI then will be to sterlise the inflows by offloading government securities during this period. However, if other eligible players are allowed into the spot and forwards markets, there is a fair chance there may be significant demand for spot dollars, thereby arresting the rise. But sharp volatility can be ruled out. Banks and Fis, for instance, are to be allowed to borrow and invest abroad. Cheap dollars locally should lead to arbitrage opportunites, thereby capping the extent of movement in the currency. Daily traded volumes in the moribund forex markets should definitely rise, as banks, financial institutions, foreign institutional investors etc. take a view on where the rupee is finally headed.

The capital markets, however, have reason to be ambivalent about the report. The Tarapore committee has reccommended the removal of all conditions regarding investments and disinvestments which irritate Sebi registered investors. While this should enthuse greater portfolio investment, the fact remains that such investment will not be indiscriminately spread over all stocks. The better stocksthe so called FII stocksstand to gain immensely. The wedge between these stocks and the bulk of the listed stock will be more pronounced. Moreover, the best of Indian corporates will be inclined to tap the GDR and the ADR markets, leading to greater export of the domestic capital market.