Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath today said the central bank was not keen on allowing banks to guarantee corporate bonds.
“RBI has been of the view that while this may increase the attractiveness of the bonds in the short run, the underlying objective of de-risking banks’ balance sheets and the true price discovery for credit risk in the market can never be developed,” she said on the sidelines of the Fixed Income Money Market Derivatives Association of India-Primary Dealers Association conference here.
She also said if India could have a term-CD market, it could be a surrogate for a term money market. An RBI and Securities and Exchange Board of India (Sebi) team was studying how other markets were handling interest rate futures, she said.
“Other than the US and the UK, which have physical delivery, most emerging markets have not been able to mandate physical delivery,” said Gopinath. She said that 90 per cent of such trades were cash-settled, so we know that if it is cash-settled, then there is no perfect connect.
“The issue for us is should we leave the market in such a limbo or should we try cash-settled to improve liquidity in the bond markets. If we try cash settled, then clearly there are two-three issues. One of the main issues was a realistic reference price for doing settlement,” Gopinath said.
She said RBI was keen on developing the two-year and five-year market as banks were more interested in investing in these tenures than in the 10-year one. “The 10-year is okay but probably shorter term IRFs will move faster than the longer terms,” Gopinath said.
Citibank fraud case Gopinath said the Citibank fraud case would require an internal bank mechanism review and that it was not a financial risk but a fiduciary one. “The relationship of the bank and the customer is fiduciary in a wealth management system, so one has to look at that and whether there are proper systems and controls,” she said.
She added that in this case it was not actually lending or borrowing, but distribution of third-party products. “It is internal systems and controls that need tightening. The internal audit and concurrent audit mechanism should be known, on how did it work,” Gopinath said.
The fraud was uncovered last month at the bank’s Gurgaon branch, where deposits from high net-worth individuals (HNIs) were diverted to the stock market.
