RBI to deepen retail market, hints at tapering liquidity

MUMBAI: Reserve Financial institution of India (RBI) governor Shaktikanta Das on Tuesday spoke of measures to deepen retail participation whilst he hinted at preparations to normalise the liquidity pumped into markets within the wake of the pandemic.
“As markets settle all the way down to common timings and functioning and liquidity operations normalise, the RBI may also conduct fine-tuning operations every so often as wanted to handle unanticipated and one-off liquidity flows in order that liquid circumstances within the system evolve in a balanced and evenly distributed method,” Das stated. He was delivering the keynote tackle on the annual convention organised by the Fastened Earnings & Cash Market Derivatives Affiliation (FIMMDA) and the Major Sellers Affiliation of India (PDAI).
Das additionally stated that the RBI will work with major sellers to popularise STRIPS — Separate Buying and selling of Registered Curiosity and Principal of Securities. This can be a system that may allow conversion of presidency securities into zero-coupon bonds the place a lump sum is paid on maturity. This will likely be one of many measures by the RBI to develop a retail marketplace for gover nment securities.

Beneath the STRIPS mechanism, if there’s a long-term bond for, say, 10 years, a major supplier can promote the principal to at least one investor and the periodic curiosity funds to different traders. The benefit is that an investor on the lookout for short-term authorities bonds should buy the coupon (curiosity) funds and a longterm investor should buy solely the principal. Zero-coupon bonds are widespread with traders who save for long-term plans or objectives like retirement as they don’t have to fret about reinvesting the curiosity.
Das stated that the intention behind introducing STRIPS was to draw retail traders. Bond sellers say that it has not taken off in retail. “Going ahead, it might be fascinating for the Reserve Financial institution and the market our bodies like FIMMDA and PDAI to work collectively to popularise the STRIPS instrument additional,” Das stated.
He added that apart from STRIPS, the RBI has been working to advertise retail participation by introducing area of interest merchandise like sovereign gold bonds and financial savings bonds. Different steps to advertise retail embrace permitting non-competitive bids in major auctions and permitting buying and selling in odd heaps. The central financial institution has additionally opened up its bond market infrastructure by linking it with trade buying and selling techniques.