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Financial Market
By Anthony Green
Orderly conditions prevailed in financial markets during 2001-02 with brief periods of uncertainty associated with extraordinary events in September and December 2001. Barring these episodes, the call market remained stable and generally range-bound within the informal reporeverse repo corridor. The foreign exchange market experienced comfortable supply conditions. Yields fell across all maturities in the government securities market, accompanied by a significant rise in turnover.
Orderly market conditions were engendered by the active management of liquidity in the money, foreign exchange and gilt markets. The Reserve Bank absorbed sizeable liquidity on a continuous basis through repos. Foreign exchange purchases were effected to offset strong capital inflows and open market sales of government securities were employed on some occasions to absorb excess liquidity.
Market reactions to the September 11, 2001 event were calmed by injections of liquidity through reverse repos, a series of open market purchases of government securities to support the gilt market and foreign exchange sales. The development of financial markets in terms of building up the institutional and technological infrastructure and fine-tuning of market microstructure was continued apace with the changing context of the regulatory function.
The Negotiated Dealing System (NDS) was operationalised with effect from February 15, 2002 with 41 participants. The NDS provides on-line electronic bidding facility in the primary auctions of Central/State Government securities and OMO/LAF auctions. It enables screen-based electronic dealing and reporting of transactions in
market instruments, secondary market transactions in government securities and facilitates dissemination of information on trades with the minimal time lag. It also permits paperless settlement of transactions in government securities with electronic connectivity to the Clearing Corporation ofIndia Limited (CCIL) and the delivery versus payment (DVP) settlement system at the Public Debt Office.
As on August 5, 2002, 138 SGL account holders had joined the NDS. On an average, 526 deals were reported daily on NDS, of which 473 deals for Rs.11,668 crore were ready for settlement during the quarter ended June 2002. These deals comprised
market deals, outright government securities trades and repo transactions among market participants. The settlement of government securities transactions through the CCIL constituted 91.3 per cent of total government securities trades dealt/reported on the NDS.
The CCIL also commenced its operations from February 15, 2002 in clearing and settlement of transactions in government securities. Acting as a central counterparty through novation, the CCIL provides guaranteed settlement and has in place risk management systems to limit settlement risk. It operates a settlement guarantee fund (SGF) made up of contributions from its members and backed by lines of credit from commercial banks. All repo transactions have to be necessarily put through the CCIL while all outright transactions up to Rs.20 crore have to be settled through the CCIL. The option to settle outright transactions in government securities above the facevalue of Rs.20 crore either directly with the Reserve Bank or through the CCIL is available to NDS members.
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