Exclusive: India central bank starts to monitor growing trades by companies in debt markets

[October 08, 2014]  MUMBAI (Reuters) - Worried that a surge in trading in debt markets by companies could pose risks to financial market stability, India's central bank has ordered its supervision team to monitor their trades, sources with direct knowledge of the situation said.

The move is the strongest expression of concern yet from the Reserve Bank of India (RBI) about companies which are building large trading positions in debt and currency markets.

Such trading can be a lucrative extra source of profits for corporate treasurers in addition to revenue from firms' more traditional businesses. But it exposes the companies to greater price volatility and there is a regulatory gray area about who supervises trades by companies in those markets.

"There is a surveillance team which is looking into the deals between banks and corporates. It is easier to get data from the banking side since the Reserve Bank controls them. The team is on the job," said a policymaker directly aware of the developments.

The official declined to specify what specific risks the team was probing. All of the sources from both the central bank and commercial banks declined to be identified because the information has not been made public.

The RBI was not immediately available to comment.

Companies are legally allowed to invest in markets in India, but it has seldom raised central bank concerns until recently, when they have become much more active players.

In the most public statement by a central bank official on the issue so far, RBI Deputy Governor H.R. Khan warned on Saturday about the potentially destabilizing impact from companies trading in currencies and bonds, adding huge positions by these entities could pose risks to economic and financial stability.

But Khan, the deputy governor in charge of foreign exchange regulation and bond markets, did not explicitly detail the risks and stopped short of warning about any specific action.

"The exchange rate being an important macroeconomic variable, unregulated trading in it has potential adverse consequences for macroeconomic and financial stability," Khan said according to the speech.

"As huge position-taking by the corporates has the potential of destabilizing the market, particularly during periods of uncertainty, Reserve Bank would expect adherence to the spirit of its regulations by such non-bank entities."

Khan delivered the speech at a function with currency traders on Saturday, and it was uploaded to the RBI's website on Monday. But it has received scant attention given markets were closed from Thursday to Tuesday for holidays.

(Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam & Kim Coghill)

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