mr reddy discusses issues in fixed income markets inaugural address by dr y v reddy, a deputy governor of the reserve bank of india, at the seminar on fixed income markets, organised by the national stock exchange and isma in mumbai on 11 / 02 / 99. ( dr reddy expresses his gratitude to dr a prasad for his valuable assistance. ) i am happy to be with you today at this seminar organised by the national stock exchange ( nse ) and the international securities market association ( isma ). the nse needs no introduction to this audience. mr patil has been, at our request, working closely with the reserve bank of india ( rbi ) on various issues and we value his advice. the nse also has representatives on a number of committees looking into different aspects of the market. isma has been performing the role of an effective self regulatory organisation ( sro ) and the rules framed by isma have become a benchmark for the fixed income securities market. hence, the expertise and experience that isma has gained over the years would be valuable to us in rbi also as we continue to develop our markets. the objective of this seminar is to assess recent changes in the indian fixed income market, review the international experience in the development of this segment of financial markets and flag the agenda for future action. major reform measures in the financial sector have been undertaken by the reserve bank of india since the beginning of the 1990s. reform in the government securities market is important in view of its role in setting benchmarks in the rest of the financial markets. it is also crucial for bringing about an effective and reliable transmission channel for the use of indirect instruments of monetary control. a notable change was the switch from administered low coupon government borrowings to auctions in government securities at market related rates. introduction of primary dealers has to some extent improved the liquidity in the secondary market. innovative financial instruments were introduced, such as zero coupon bonds, floating rate bonds, capital indexed bonds, securities on which payment is made in instalments, etc. in addition, 14, 91 and 364 - day t - bills presented investment avenues for deployment of short - term funds to investors. counterparty risk in securities settlement has been eliminated with the introduction of delivery versus payment system ( dvp ). i had, in an earlier speech a couple of months ago on debt markets, presented an agenda for further action, which covered, among others, technology, regulatory and legal issues, and the need for

– 3 – there is enormous advantage in providing member terminals to sgl account holders as this will enable them to view rbi announcements regarding fresh auction, floatation of issue, conversion of loans, repo auctions, interest rate resets for floating bonds and other such information. market participants will also be able to tender bids in auctions of dated government securities, t - bills and repos from all centres. the entire auction process, including allotment, determining and communicating payment amount, and advising successful and rejected bids to bidders, will be online. the list of successful bidders and the consideration amount payable would form the input to the settlement and servicing system. while the link - up has advantages, it can be made operational only through electronic sgl forms. early enactment of the new government securities act replacing the public debt act 1944 is essential since it will provide the rbi with substantive powers to design and introduce electronic sgl transfer forms. regulation in the repo market in our market, interbank repos are permitted under regulated conditions. after the irregularities in securities transactions in 1992, eligible participants and instruments have generally been restricted but subsequently liberalised in a gradual manner. now, all government securities have been made eligible for repo. besides banks, primary dealers are allowed to undertake repo / reverse repo transactions. nonbank participants have also recently been allowed to lend money through reverse repo to other eligible participants. in terms of instruments, repos have also been permitted in psu bonds and private and corporate debt securities, provided they are held in dematerialised form in a depository and the transactions are done through a recognised stock exchange. however, this can be operationalised after the government issues a clarification regarding applicability of stamp duties on transactions in dematerialised instruments. admittedly, the interbank repo market in india needs to be made more transparent and better standardised. i have, time and again, been encouraging market participants to evolve code of best practices in the repo market through the primary dealers association or fimmdai. the rbi has also been actively pursuing this issue in the advisory committee on government securities market and the standing committee on money market. issues relating to evolving a code of best practice such as eligibility of participants and their requirements, eligibility of instruments for repo, general standards, systems and documentation, legal agreement, margin, deal confirmations, and default scenario were discussed in the recent meeting of the standing committee on money market