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FINANCIAL MARKETS SHOULD be welcoming the RBI nuance to insert put and call options to a Rs 3,000-crore 10-year gilt float on Wednesday. It should help the Government calibrate the interest outgo on future borrowings. The Rs 3,000-crore 10-year paper translates into a five-year paper with the investor allowed the put (sell) option and the issuer the call (buy) option after five years depending on the interest rate expectations. Markets believe the new five-year paper could be picked up entirely at an yield of 6.50-6.60 per cent based on the current yield of five-year paper of 6.61-6.75 per cent. Perhaps, the market has now a paper which could be indicating the future price of money and seems a sharper alternative to the floaters in the market. For the time being the Government is taking good advantage of low interest rates in the secondary market to temper the bulge on future interest and principal outgo. Some perspective players feel the move could have been scheduled a bit early as the price of funds have been steadily dropping. In many ways, the RBI strategy hints at an extended run for the low yields scenario, and market players are not disagreeing as substantial dollar purchases by the central bank to keep down the value of the rupee only adds to domestic liquidity.

The latest move, however, does not lighten any of the high-cost debt the Government has run up in the past. Over the last two-three years the Finance Ministry and the RBI have been in talks on how to tackle that burden, mainly caused by mindless revenue expenditure at the Centre. Indian corporates have been savvier being abreast with the niceties of financial play. The Finance Ministry has been thinking of getting the Government to directly buy back debt at market rates, but the RBI has resisted it stiffly as that would bloat the fiscal deficit. With the sharp price appreciation in government paper, the Centre would have been out of pocket as no market player will part with holdings at par value. Cheap government borrowings over the last two years should help retire high-cost debt and the RBI has been just doing that as a public debt manager. Apparently, the RBI has won the argument, with New Delhi agreeing to attach put and call options. From here on, will the RBI look at divesting its job as a merchant banker of New Delhi and set up an Office of Public Debt as suggested by the Tarapore Committee on Convertibility? For long, the monetary policy has been working in the shadows of a spendthrift government and the RBI getting out of the primary market should be warning enough.

Does all this mean anything to an ordinary entrepreneur or farmer or a street kiosk selling fast food. Bankers have not taken the cue from the happenings in the secondary market, with the entire financial system focussing on triple-rated corporates. Is there no triple-rated farmer in India Interior and has Crisil or any other rating agency ever thought of rating the farming community? How Mumbai-centric can the system get? Banks are claiming to take a negative spread on funding triple-rated companies when they pay little interest on savings and current accounts, forming around 15 per cent of the total deposits. Leading banks still charge 11-13 per cent (fixed) for infrastructure projects. Apparently, the Indian banking system is structured to work only in a high-interest rate environment.

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