RBI gets nod to set up rules for derivative instruments
RBI has been given the go ahead to set up a regulatory structure for the emerging market of interest rate swaps, foreign currency swaps and options and other derivative instruments by a Parliamentary committee.
By TNN |
DELHI: RBI has been given the go ahead to set up a regulatory structure for the emerging market of interest rate swaps, foreign currency swaps and options and other derivative instruments by a Parliamentary committee. The recommendations have been made by the standing committee on finance, which has cleared the re-introduction of the RBI (Amendment) Bill, ���05 in the house.
This means over-the-counter derivative instruments, which are largely traded by banks on a bilateral basis will now get a policy framework, under the RBI. The report has also agreed with the plan to give RBI the powers to set the cash reserve ratio (CRR) for banks without any ceiling.
The CRR is used by the RBI to impound a percentage of the cash reserves of commercial banks or release them as part of the monetary management of the economy. The floor and ceiling for the CRR, were restricting the manoeuvrability of the RBI to control liquidity in the economy and was out of sync with the progressive use of indirect instruments that the bank now uses.
The committee has made a significant change ��� it has aligned the definitions for repo and reverse repo with the international definitions. The draft bill had used the RBI definition of repo as ���an instrument for lending funds by purchasing securities...��� It had also defined reverse repo to mean ���an instrument for borrowing funds by selling securities...���
But as PNB Gilts chief Sunita Gupta says, this definition was appropriate from the perspective of RBI, which stood opposite to banks in these transactions. The standing committee has defined repo as an instrument for borrowing funds by selling securities, and reverse repo as an instrument for lending funds by purchasing securities. The finance ministry has told the committee, that the modified expressions ���are in conformity with the market usage in the country and the common practice followed globally.���
This means over-the-counter derivative instruments, which are largely traded by banks on a bilateral basis will now get a policy framework, under the RBI. The report has also agreed with the plan to give RBI the powers to set the cash reserve ratio (CRR) for banks without any ceiling.
The CRR is used by the RBI to impound a percentage of the cash reserves of commercial banks or release them as part of the monetary management of the economy. The floor and ceiling for the CRR, were restricting the manoeuvrability of the RBI to control liquidity in the economy and was out of sync with the progressive use of indirect instruments that the bank now uses.
The committee has made a significant change ��� it has aligned the definitions for repo and reverse repo with the international definitions. The draft bill had used the RBI definition of repo as ���an instrument for lending funds by purchasing securities...��� It had also defined reverse repo to mean ���an instrument for borrowing funds by selling securities...���
But as PNB Gilts chief Sunita Gupta says, this definition was appropriate from the perspective of RBI, which stood opposite to banks in these transactions. The standing committee has defined repo as an instrument for borrowing funds by selling securities, and reverse repo as an instrument for lending funds by purchasing securities. The finance ministry has told the committee, that the modified expressions ���are in conformity with the market usage in the country and the common practice followed globally.���
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