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India gilts players need attitude change: RBI chief

MUMBAI: The Reserve Bank of India (RBI) said on Saturday that banks and financial institutions must move away from a "buy and hold to maturity" strategy to develop the gilts market.

"Banks and financial institutions often shun trading to avoid booking of losses without recognising the implicit opportunities available to cut losses or to improve yields," RBI Governor Chakravarty Rangarajan told a seminar.

The goverment has issued 907.2 billion rupees ($26.7 billion) worth of gilts, or dated securities, since April 1, 1992. There was another 85 billion rupees in outstanding auctioned treasury bills, Rangarajan said.

A vibrant gilts market sets the benchmark for interest rates and also serves as a medium for the central bank to display monetary policy intentions, he said.

The central bank chief was delivering the keynote address at a seminar on the government securities market organised by the Securities Trading Corp of India (STCI).

STCI is one of two primary dealers who act as market makers for government securities.

STCI chairman Dipankar Basu said India's gilts market suffers from illiquidity, with direction set by conditions in the money market.

"When liquidity is tight, there are only sellers and no buyers. Also, sellers are usually reluctant to book any losses," he said.

Rangarajan said it was important to widen the investor base, which is now largely confined to banks and financial institutions.

"Banks with a large branch network could popularise and attempt retail distribution of government securities to their clients," he said. "Primary dealers should also make special efforts in marketing these securities".

Another way to reach out to retail investors was the mutual fund route, he said.

"Dedicated gilt-funds could be set up by mutual funds. While there are several public and private sector mutual funds, their concentration has been on income and growth-oriented schemes focusing essentially on the equity market," the governor said.

He said there was scope for attracting retail investors through such funds as there were several investors who attached importance to the safety and liquidity offered by gilts.

Basu said resource constraints made it difficult for primary dealers to quote prices for large amounts as they had no access to special sources of financing when money was tight.

He said one solution lay in opening up of the repo market to non-bank corporates and institutions and to broaden the range of securities subject to repurchase agreements.

Repos provide more than 95 percent of the funding needs of primary dealers and broker-dealers in the majority of developed markets, he said.

The RBI curtailed repo transactions after a multi-billion dollar securities scandal in 1992. The Indian repo market is now largely limited to interbank deals.-Reuter