Primary dealers told to shape up

The Reserve Bank of India is learnt to have asked primary dealers (PDs) to restructure their operations and equip themsleves for undertaking government borrowing programmes single-handedly in the post FRBM (Fiscal Responsibility and Budget Management) scenario in 2006.

The central bank has also asked PDs to submit their action plans. The RBI has urged PDs to increase their capital size or even merge with their parent banks for sustainability in the long run.

With rising interest rates, PDs are finding it tough to make money from their operations. Most PDs have posted net losses in 2004-05.

At a meeting with PDs today, the RBI is understood to have expressed its concern on the future of government borrowing programme post 2006. Under the FRBM Act, RBI will no more participate as a merchant banker in the government auction.

This means if the government papers are not subscribed fully by the banks, RBI will no more subscribe to them by taking devolvement on itself. So, it will be the exclusive domain of primary dealers.

The PDs asked the RBI to introduce short-selling of government securities and push forward an "when issued market" as necessary risk management tools for allowing more volatility and trading options in the market.

Short selling will facilitate a trader to commit on a security even before is actually available in the kitty. Under the current norms, no trade can take place in securities till they are available in the portfolio.

The PDs also stated that there was no appetite for government papers in the market. This is because banks are already holding 40 per cent of securities under statutory requirement (SLR) against 25 per cent.

Moreover, incremental deposits are being ploughed back into loans. "Lack of appetite among banks is a major concern," said a primary dealer.

2017, 2034 papers to be reissued

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The government will be reissuing 8.07 per cent 2017 and 7.50 per cent 2034 papers for a notified amount of Rs 5000 crore and Rs 2000 crore, respectively.

The government of Kerala will also be raising around Rs 300 crore next week.

Thus, next week will witness a total outflow of Rs 7300 crore only towards government auction. However, bond dealers feel the illiquidity in the market will subside as there is great demand for 8.07 per cent 2017 paper.