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Standalone primary dealers eye term repo market

Standalone primary dealers (PDs) have urged the Reserve Bank of India (RBI) to allow them to participate in the term repo market so that they can reduce borrowing costs. Experts say the move will also help develop the term repo market.

Currently PDs are allowed participation in the call borrowing and lending segments. RBI also allows them to be part of overnight collateralised markets such as RBI repo, market repo and collateralised borrowing and lending obligation (CBLO).

PDs underwrite and participate in auctions of government securities and Treasury bills. They aren’t allowed to participate in the term repo market.

“We believe we will be able to play a larger role in the development of the term repo market if we are allowed to participate in RBI’s term repo auctions. It will also help bring down the cost of borrowing, which will help PDs participate more meaningfully in these auctions. With carry-on government bonds almost negligible and uncertainty in the markets increasing in recent times, carrying a large book is fraught with risks,” said a senior official of a standalone PD.

In July 2013, RBI had capped the borrowing limit for standalone PDs under its daily repo window at 100 per cent of their net-owned funds. Standalone PDs borrow from RBI’s repo window, call money and CBLO to meet settlement obligations towards securities purchased in government auctions as well as in secondary markets.

PDs can also lend in the CBLO and call money markets.

“If standalone PDs like us can borrow from the term repo market, it will open another liquidity window for us. But as of now, we have no urgency for this window because liquidity is comfortable,” said S K Dubey, managing director of PNB Gilts.

Currently, there are seven standalone PDs in the system – PNB Gilts, ICICI Securities Primary Dealership, Nomura Fixed Income Securities, STCI Primary Dealer, Morgan Stanley India Primary Dealer, SBI DFHI and Goldman Sachs (India) Capital Ma-rkets.

In October 2013, RBI had introduced term repo auctions for banks. Under this, banks have to place bids at the term repo rate they are willing to pay RBI through the tenure of the repo, expressed in percentage (up to two decimal places). Once the bidding period is over, all the bids are arranged in descending order of the term repo rates quoted; the cut-off rate is that corresponding to the notified amount of the auction. Successful bidders are those who place bids at or above the cut-off rate.

The total liquidity injected through term repos are limited to 0.25 per cent of the banking system’s net demand and time liabilities.


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