RBI may nudge banks to use negotiated dealing system

The Reserve Bank of India (RBI) in its credit policy may urge banks to shift to the negotiated dealing system (NDS) for trading in government securities. At present, NDS is used only for settlement of trades.

According to banking sources, though it will not be mandatory for banks to trade on the NDS, RBI may encourage trading on the platform, parallel to the existing telephone market.

NDS is an electronic trading platform where prices and bids could be matched anonymously and, thus, could lead to better price discovery. Since the trader's identity will not be revealed, prices will move only through demand and supply.

This has been a part of the recommendation of the technical advisory committee set up by the RBI and headed by R H Patil.

To streamline the government borrowing programme in the post FRBM (Fiscal Responsibility an Budget Management Act) scenario, the RBI seems to be favourably considering the proposal of allowing banks to have primary dealership (PD) as a division rather than a subsidiary.

Economists and finance ministry officials had met the RBI governor to discuss ways for a smooth government borrowing programme.

The long standing demand, especially made by foreign bank-promoted primary dealers, will help in two ways, said a banking source.

At first, PDs could manage costs even in unfavourable interest rate conditions. Secondly, as the RBI will not be a direct underwriter for the borrowing programme post 2006, market players feel that some select banks could be given a bidding commitment to ensure smoothsailing of the borrowing programme.

Till now, RBI as the underwriter could take the auction amount on itself if the market did not subscribe to it. While it will not be there, market players feel the bidding commitment could be shared by banks with a large capital base.

A fixed allocated bidding commitment implies that the specific bank or PD will have to subscribe to the auction if it fails to get absorbed by the market.

Under the current RBI guidelines, a bank promoting a PD will have to set up the business an an separate subsidiary so that bank business should not get affected either way with the PD.

Market players said the RBI could frame guidelines to maintain a PD as an arm within the bank, while maintaining a Chinese wall in the operations.