Primary Dealers (PDs) occupy an important place in the Indian Capital Market. This article analyzes PDs in developing countries vis-à-vis developed countries and provides a set of suggestions for an efficient PD system in India.
The
Union budget 2006 reflected the sentiment that the Indian debt market was on the
threshold of momentous changes that could well transform it into an efficient,
transparent and vibrant one. This market basically comprises of a wholesale participants
with major participation from banks, other financial institutions and the Primary
Dealers (PDs). Table 1 indicates that the business growth on the Wholesale Debt
Market (WDM) segment was on the upswing from the year 1994-95 when the net traded
value, which was Rs. 6781.15 cr during that year steadily increased and continued
up to 2003-04 when it touched Rs. 1316096.24 cr. Thereafter, the business slumped
to Rs. 887293.66 in 2004-05, and further went down to Rs. 475523.48 cr in 2005-06.
It
was expected that with the ushering in of changes in the market, the business
volumes would improve along with an improvement in the retail participation in
the market. A change came around as the Reserve Bank of India (RBI) in its annual
policy statement for the year 2005-06 announced that it would expand the permitted
structure of PDs and include banks. Accordingly, the RBI authorized Bank of America,
Hongkong and Shanghai Banking Corporation Ltd. and JP Morgan Chase Bank to undertake
PD business effective from August 28, 2006.
In
this scenario, it is interesting to note that the very institution of PDs has
been a subject matter for debate. Also the acceptance and operation of the PD
system lacks consistency in terms of its position within the financial system
in the developed vis-à-vis developing countries. The PD system usually
fails to have the supportboth from the government and the Central Bank of the
country, during a country's initial stages of economic development. Considering
these limitations, apparently the odds are against the operation of a PD system
in the developing economies.
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