Monetary policy measures

AS PART of the April 2000 policy statement, certain measures were announced to facilitate the development of the Forward Rate Agreements/Interest Rate Swaps (FRAs/IRS) and Certificates of Deposit (CDs).

Similarly, the policy stance relating to call/notice money market and Commercial Paper (CP) were also indicated. After a review of the developments, the following measures are being introduced:

Permission to non-banks to lend in call money market

Following the recommendations of Narasimham Committee II, the RBI has taken several steps to widen the participation in repo market such as, (i) permission to non-bank participants maintaining current and SGL accounts with the RBI to undertake both repo and reverse repo; (ii) reduction in minimum maturity for repo transactions to one day; (iii) State government securities being made eligible for undertaking repos; and (iv) opening of its purchase window to impart liquidity to government securities whenever the situation warrants.

To improve the LAF's efficacy and make the money market more efficient and enable the development of a short-term rupee yield curve, as recommended by the Committee, it is necessary to move towards the objective of pure inter-bank call money market as early as possible. However, since the repo market is yet to be broad-based in terms of instruments and participants and acquire enough depth, it has been decided to extend the permission granted to select corporates that have been permitted to route call money transactions through Primary Dealers (PDs), which is now available up to December 2000 for a further period of six months, that is, up to June 2001.

In addition to these select corporates, there are several non-bank institutions such as Financial Institutions and Mutual Funds currently permitted to lend directly in the call/notice money market. In order to make necessary transitional provisions, in respect of these institutions also, before the call money market is confined only to banks/PDs, it has been decided to constitute a Group to suggest a smooth phase out by a planned reduction in their access to call/notice money market. This Group will also include representatives of non-bank institutions.

Transfer of certificates of deposit (CDs)

At present, while the minimum maturity period for CDs is 15 days, there is also a restriction that CDs issued by banks and financial institutions cannot be transferred or transacted in the secondary market before 15-30 days from the date of issue. To provide flexibility and depth to the secondary market, it is proposed to withdraw the restriction on the transferability period for CDs issued by both banks and financial Institutions.

Rating requirement for term deposits raised by financial institutions

At present, mobilisation of term deposits by select all-India financial institutions, governed by the RBI guidelines, do not require any rating. In order to improve the market's functional efficiency, it is proposed to make rating mandatory for the term deposits accepted by all-India financial institutions with effect from November 1, 2000.

(Edited-extracts from the RBI mid-term review of the Monetary and Credit Policy.)