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October 19, 2001
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Indian debt market sees few new measures in RBI policy

India's debt traders expect the central bank to continue with its steps to improve market depth and trading practices in its mid-year policy review on Monday but no new, radical measures are likely.

Market players are uncertain about the prospects for a rate cut although many expect the Reserve Bank of India to announce some measures to further loosen its easy monetary policy.

Most expect a reduction in banks' cash reserve ratio, with some holding out hopes that the bank rate may be cut.

Traders and debt analysts say the central bank has already plotted the course for the markets and systems and the current policy review may just be a report card on the progress made.

In recent years, the central bank has replaced part of its fixed rate funding assistance to markets with auction-based repos, created new benchmarks for the fledgling derivatives market and has started work on automating transactions.

"This policy is going to maintain a status quo as far as market systems and practices are concerned," said a dealer with a state-run bank.

"There is little point in announcing new intentions until we make some progress on what's been committed."

MAY NOT TINKER WITH REFINANCE

The RBI's experiment with the liquidity adjustment facility it introduced last year, to set more market-related rates on its refinance and to ensure it was not taken for granted as a lender of last resort, has been a success.

In the past 12 months, call rates have rarely spiked outside the two-per cent band between the reverse repo and repo rates at which the central bank lends and borrows from the market.

The repo and reverse repo rates have been steady at 6.5 per cent and 8.5 per cent respectively for several months.

The RBI has said the LAF should eventually replace another approximately Rs 80 billion of refinance it now gives against export loans and as support to primary dealers at the bank rate, which is currently seven per cent.

"They are committed to moving all the refinance to an auction-based system, but it is unlikely they will do it this time," said JP Morgan's debt analyst Siddharth Mathur.

Bankers however expect the central bank will make refinance against lending to exporters, estimated at around Rs 40 billion, cheaper to compensate banks for a reduction in export finance rates last month.

In September, the RBI told banks they should charge exporters a maximum of 2.5 percentage points below their prime lending rates, a reduction of a percentage point from the prevailing cap.

Srinivas Varadarajan, chief dealer at Chase Manhattan bank, said the RBI could consider linking the export refinance to the RBI's repo auction rate, but this would entail the risk of exposing the cost of refinance to a short-term and more flexible reference rate.

INFRASTRUCTURE NOT IN PLACE

A lot of other proposals for the debt market have been held up by the slow progress to set up the Negotiated Dealing System, which will help the market move to Real Time Gross Settlement of securities transactions.

That could give the debt market the additional depth, liquidity and ease of settlements needed for introduction of instruments like futures and STRIPS (Separate Trading of Registered Interest and Principal Securities).

The central bank may permit 'when-issued' trading in bonds, which enable price discovery prior to the issue, and increase the size of treasury bill issues, traders said.

Bankers said the RBI might ease the $10 million limit it has imposed on unhedged currency swap positions for banks, but is unlikely to interfere in the interest rate swaps market.

So far, the overnight-indexed swap is the only interest rate derivative actively traded by the markets, and traders said short-comings such as the limited participation by state-run banks and dearth of longer-term benchmarks will be resolved in time as the market matures.

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