Primary dealers criticise interest rate policy uncertainty

Primary dealers criticized interest rate policy uncertainty and have resisted Central Bank moves to increase their minimum capital requirement. Primary dealers criticized interest rate policy uncertainty and have resisted Central Bank moves to increase their minimum capital requirement. A proposal to bring in a risk weighting for capital, over time is expected to go to the Monetary Board in two weeks instead.

Primary dealers say they are now market neutral because interest rates don’t seem to reflect macro economic realities. Dealers, who spoke on condition of anonymity, also said the chief monetary authority doesn’t seem to be acting independent of the government.

The Central Bank says a committee that also included primary dealers has submitted recommendations to the Monetary Board.

The proposals will be taken up by the Monterey Board when they next meet in two weeks.

Central Bank officials were tightlipped about details.

Primary dealers say the committee recommended that current capital levels not be increased for the moment.

Central Bank was seeking to push the minimum capital requirement to Rs. 350 million from the current Rs. 200 million.

However Central Bank has backed down but is recommending a risk based assessment of Capital Adequacy, similar to the one done on commercial banks, be implemented for primary dealers.

Some dealers were for an increase in minimum capital earlier when inflation was lower and the macro economic situation more stable.

But dealers, who act as market makers, say they are now being forced to sit on the sidelines due to interest rate policy uncertainty.

Central Bank has held the risk free rates steady for the last four months despite a steep climb in prices of good and services measured by all inflation indexes.

Central Bank’s soft approach to interest rates has worried primary dealers who say it is risky to carry a portfolio due to the macro economic imbalances between inflation and interest rates.

They say the chief monetary authority should act to keep prices stable one of the key functions it is expected to perform.

Under the current economic climate attracting new capital will be difficult according to a dealer who also quipped a primary dealer operation can be run with Rs. 5 million capital since they don’t carry portfolios or trade.

The Treasury Secretary, one of the five members of the Monetary Board told market participants at a seminar last week, which policy interest rates wouldn’t be adjusted in the next three months.

A primary dealer who attended the seminar said that “the statement reduces the Monetary Board function to a rubber-stamping meeting, since it appears that policy has already been set”.

Dealers who made heavy losses last year after market interest rates climbed rapidly are now weary about taking positions.

The soft approach to interest rates and market uncertainty has thinned out trading of Treasury Bonds in the secondary market, which have longer maturities than the Treasury Bills.

The market yield curve extended to ten years with active trading in bonds that will mature in the next half a decade.

However, primary dealer bond holdings have halved to around Rs. 15 billion from Rs. 27 billion at the beginning 2004.

Many of the bond holdings are with dealers who can transfer their portfolios to their parent companies in the event of a rate hike.

Central Bank also holds Rs. 73 billion in Treasury Bills.

It has been buying most of the T Bills issued in the last few months according to analysts. It does not hold any Treasury Bonds.

Most of the bond issues are bought by captive funds like the EPF and the ETF and State banks.

Central Banker’s say, state managed sector takes up almost the entire bond auction in some weeks.

-LBR Newsdesk:
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