In a bid to expand the sources of funding for standalone primary dealers (SPDs), the Reserve Bank of India has allowed them to borrow in foreign currency.

The central banksaid SPDs, which are key intermediaries in the Indian Government securities (G-Sec) market, can borrow in foreign currency from their parent or correspondent outside India or any other central bank permitted entity and avail overdraft in nostro accounts (not adjusted within five days), only for operational reasons.

This comes in the backdrop of JP Morgan’s September 2023 announcement on India’s inclusion in its Global EM Bond Index. In March 2024, Bloomberg said it will include India Fully Accessible Route (FAR) bonds in the Bloomberg Emerging Market (EM) Local Currency Government Index and related indices.

Risk management

Billions of dollars’ worth of investments is expected to flow into the Indian G-Sec market due to inclusion of Indian government bonds in the aforementioned indices. Hence, the expansion in the scope of funding for SPDs should be seen in this context.

So far, SPDs could borrow funds from call/notice/term money market, repo (including CBLO) market, inter-corporate deposits, FCNR (B) loans, commercial paper and non-convertible debentures. They are also eligible for liquidity support from the bank.

In 1995, RBI had introduced the system of primary dealers (PDs) to strengthen the infrastructure in G-Sec market to make it vibrant, liquid and broad based; ensure development of underwriting and market making capabilities for G-Sec outside the RBI and improve secondary market trading system.

Trade repository compliance

The central bank, in its amended Master Direction on Risk Management and Inter-Bank Dealings, said if foreign currency drawals are in excess of prescribed limits and are not adjusted within five days, a report, should be submitted to it within 15 days from the close of the month in which the limit was exceeded.

The RBI said authorised dealers (ADs) (banks authorised to deal in foreign exchange/FX) should report all OTC (over the counter) FX derivative contracts and foreign currency interest rate derivative contracts, undertaken by them directly or through their overseas entities (including overseas branches, IFSC Banking Units, wholly owned subsidiaries and joint ventures of ADs), to the Trade Repository (TR) of Clearing Corporation of India Ltd (CCIL).

ADs have to ensure that outstanding balances between their books and the TR are reconciled on an ongoing basis.