Rbi Blames Primary Dealers For Distorting Gilt Yield Curve

The RBI's displeasure was conveyed to bankers at a closed door meeting.

This is the first time the apex bank has come down heavily on the commission that is being dished out by the PDs.

The central bank which had called for the meeting to request banks to invest money in the four year paper to be put on sale on October 7 was flatly told by the banks that they cannot invest in the security in the primary market as the price is very high.

At present, the yields on a zero coupon security with the same maturity are trading at 14 per cent, while the banks are being asked to put their money at 13.72 per cent yields.

 

The central bank officials told the bankers that it is very surprising that the securities are trading at a discount on the very first day after the sale.

When one of the bankers present at the meeting said that with the commission being passed on to them by the primary dealers, it has become possible to pick up the paper at much lower prices, the central bank officials squarely blamed the doling out of commissions by the primary dealers as the reason for the prices ruling at a discount. Some of the bankers requested the central bank to introduce guidelines to keep the commission system in check.

The central bank officials declined to do so because according to them in a deregulated environment it is not possible to clamp rules.

In the previous auctions of gilts, the PDs which pick the paper at a discount of Re 1 passed on the commission to the banks which have routed their bids through them.

This has led to different quotes of the same security the next day.

The latest security, a six-year paper which was auctioned at 13.82 per cent, was trading at a discount of 50 paise from the next day itself.

According to sources, the banks which were getting a commission of 50 paise still kept away from investing in the paper.

Not only this, the primary dealers were quoting different prices for different banks.

A north-based primary dealer passed on a large quantum of the security to its parent bank, while a Mumbai-based bank too, did a ditto, a source said.