The Reserve Bank of India (RBI) on Friday allowed relaxations for standalone primary dealers (SPDs) to operate in the foreign exchange market alongside banks with an aim to enable their customers to hedge currency risks and broaden the availability of market makers.
The RBI has allowed standalone primary dealers to offer all foreign exchange market-making facilities as currently permitted to banks. They are also allowed to participate in foreign currency settled overnight indexed swap (FCS-OIS) transactions directly with non-residents and other market-makers. The RBI had previously allowed banks to participate in the offshore FCS-OIS market with non-residents and other market makers.
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“The basic idea is to develop standalone primary dealers as market makers in financial markets,” RBI deputy governor T Rabi Shankar told reporters. Standalone PDs have access to interest rate markets where they are quite active. Since interest rate markets and currency markets are closely related, giving them access to the forex market will enable them to provide the full suite of offerings to clients, he added.
The RBI will issue details on the changes soon. The central bank announced the new norms for SPDs as part of the regulatory policy measures, along with the monetary policy decision.
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“Inclusion of SPDs as market makers in foreign currency markets and overseas interest rate markets could further improve the breadth and depth of these markets and add to the fee income of these SPDs. We note that while most of the SPDs have expertise in the bonds and interest rate derivative markets, tapping new business opportunities will require increasing manpower skills in forex markets. Moreover, if there is an overseas borrowing program of the government, the access to these markets will enable SPDs to hedge their interest rate and forex risks arising out of market making of the government’s borrowings,” Anil Gupta, vice president at ICRA, said.
According to the latest master directions for standalone primary dealers, they are allowed to offer foreign exchange products to FPI clients, but the business is categorized as a part of their non-core operations. SPDs are also required to apply to the RBI for the authorized dealer license.
“On the regulatory front, a key development was to allow primary dealers to act as market makers in FX markets. The move is intended to broaden FX market participation. PDs have also been granted access to the offshore NDS OIS market,” Abhishek Goenka, founder and CEO of forex advisory services firm IFA Global, said.