Unidirectional movement in interest rates has made debt market investors focus more on risk containment measures
The market greeted 2003 with a bang and it looked like a never-ending party banked by comfortable liquidity conditions.
The RBI intervened once again by raising the 91-day T-bill auction amount from Rs 250 crore to Rs 1000 crore and also changed the auction method from uniform pricing to multiple-pricing.
More From This Section
Also the RBI converted four special securities from its own portfolio into marketable lots. The event risk perception was high as the US-Iraq standoff, which has now developed into a full-fledged war, worsened.
In fact, in the last week of January, the spurt of US-Iraq confrontation caused a fresh stirring-up of yields across tenors. Then came the speculation on the Budget.
Though there were positive sentiments as the finance minister, Jaswant Singh, cut the small savings rate by 100 basis points in the 2003-04 Budget and the RBI surprised the market further by cutting the Repo rate and savings deposit rate by 50 basis points each, the cheer was short-lived.
For one, the month of March in particular saw a lull in the market with the cricket "World Cup" drawing the attention and focus of market players waiting to unwind from their mundane routines.
The war cry added fuel and market volumes dropped drastically. There was a slight tightening of liquidity due to issuance of state loans. Many players also refrained from trading in the market.
However, the span of war is expected to be short and there may be opportunities for bargain buying ahead of the new fiscal.
On the operational front the anonymous screen-based order-driven trading in government securities on stock exchanges by way of the Negotiated Dealing system (NDS) is an excellent step taken forward by the RBI.
This will go a long way in ensuring an effective and robust price discovery mechanism. Also banks are advised by the RBI to maintain a minimum of five per cent of their total investment portfolio as Investment Fluctuation Reserve to guard against any sudden increase in interest rates.
In line with the uni-directional market movement, it became important for regulators to emphasise stringent risk management systems.
The Reserve Bank of India issued guidelines for banks and primary dealers to have a Risk Based Supervision (RBS) system in place by 2003.
This will have to adhere to international norms issued by the BIS (Bank of International Settlements) by 2006. Sebi also issued guidelines to all mutual funds to have a Risk Management Cell from April 1, 2003.
The concept of