Pure play: Primary dealers don’t call in here

MUMBAI: While the Reserve Bank of India wants to phase out primary dealers from the call money market, participants are wary of such a measure since the repo market is yet to fully develop.

As part of the move to make the call money market into a pure inter-bank market, non banks — which include primary dealers, financial institutions and corporates — will now be allowed to lend up to 75 per cent of their average lending in the call market during ‘00-01. This will be down from 85 per cent, which was effective since May 5, ‘01.

The central bank will shortly announce the date, from which the reduction in the lending by non-banks in the call market becomes effective. “RBI will announce the date of effectiveness of stage II (lowering lending to 75 per cent), depending on the date when the Negotiated Dealing System and Clearing Corporation of India (CCIL) will become fully operational and widely accessed,� said RBI in its Monetary and Credit Policy.

The RBI will set up a working group to recommend, by June 30, ‘02, the criteria for fixing the limits for PDs in the call/notice market and prepare a roadmap for phasing them out of the call market.

In the second stage for developing the liquidity adjustment facility (LAF), the first level of assured refinance — collateralised lending facility will be phased out with effect from the fortnight beginning October 5. This is likely to be replaced by variable rate repos, which are already in place through reverse repos.

Dealers said that funds disbursed through the repo facility, which replaces CLF, will be at the cut-off repo rate, while the reverse repo facility, which replaced the additional collateralised lending facility (ACLF) two years back will be the cut-off rate, 200 basis points above the repo rate.

Dealers say that the call/notice market is the only source of day-to-day funding for PDs. In developed financial markets, PDs rely on repos to meet their funding requirements. For repos to succeed as an effective liquidity mechanism, the market for this needs to be more developed and the settlement system geared to remove bottlenecks.

At present, if a market participant borrows funds through one day repos, by pledging securities, it cannot sell securities till two days later. This is because, though the RBI’s public debt office may credit the securities in the participant’s SGL account before the end of trading the next day, it does not allow sale of these securities.

This is to avoid a gridlock in the system. “Today, PDs rely overwhelmingly on call/notice market for their funding needs,� said RV Joshi, managing director Securities Trading Corporation of India.

“PDs have asked the RBI to allow them to sell securities the same day. With the CCIL becoming full operational, this could be allowed in the due course of time,� said Arun Kaul, managing director PNB Gilts.