How To Facilate The Market

By Author: Anthony Green
Total Articles: 36
Comment this article

Development of financial markets is viewed as a continuum and an essential concomitant in the process of financial sector reform. The medium-term objective is to develop the call/notice money market into a pure inter-bank market while simultaneously broadening and activating other segments of the money market. Deliberations are also underway for extension of repos to CSGL account holders.

It is also expected that the CCIL would offer variants of repo products for facilitating liquidity and cash management and enlargement of repos to other participants. The phased evolution of the LAF towards becoming the primary instrument for liquidity management is consistent with this objective.

It is expected that the operationalisation of NDS and CCIL would give a fillip to secondary market activity. The next phase of operationalisation of PDONDS project will provide for centralised securities settlement system with distributed servicing to investors through regional PDOs. It will help in increased geographical participation in primary issuance of government securities from terminals located at regional PDOs and member terminals ...
... connected to the system.

A road map for developing Separate Trading for Registered Interest and Principal of Securities (STRIPS) has been prepared. The Reserve Bank is actively pursuing the creation and development of the STRIPS market which, in addition to providing more flexibility in managing interest rate risk, would help in addressing the asset-liability mismatch problem of banks/institutions. Banks with typically short maturity funding can hold short duration STRIPS while the longer duration STRIPS can be held by insurance companies and pension funds, etc.

To facilitate the market for STRIPS which are essentially zero coupon bonds (ZCBs), the tax anomaly that existed in respect of ZCBs has been removed by Central Board of Direct Taxes (CBDT) in a notification issued in February 2002. Accordingly, ZCBs are now to be taxed on a total return basis by treating the marked-to-market gains to the holder during the assessment year as taxable.

A proposal for replacement of the existing Public Debt Act, 1944 by Government Securities Act has been approved by the Central Government. The concurrence of almost all the State legislatures has also been obtained. The enactment of the Government Securities Bill would simplify the procedures for transactions in government securities and allow for lien-marking/pledging of securities and recognise the legal rights of benefical owners.

India�s exchange rate policy of focusing on managing volatility with no fixed rate target, while allowing the underlying demand and supply conditions to determine the exchange rate movements over a period in an orderly way, has stood the test of time. The Reserve Bank will continue to follow the same approach of watchfulness, caution and flexibility while dealing with the foreign exchange market.