Worried that a surge in trading in debt markets by companies could pose risks to financial market stability, the Reserve Bank of India 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 RBI about companies that are building large trading positions in debt and currency markets.

Lucrative source

Such trading can be a lucrative additional source of profits for corporate treasurers, besides revenue from more traditional businesses. But it exposes the companies and broader markets to price volatility and there is a regulatory grey 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 RBI controls them. The team is on the job,’’ said a policymaker directly aware of the developments.

The official declined to say what specific risks the team was probing. All the sources 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 the practice has seldom stirred central bank concern 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 against the potentially destabilising impact of trading by companies in currencies and bonds, adding that their huge positions could pose risks to economic and financial stability.

But Mr. Khan, who is in charge of regulation for these 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 in a speech posted online by the RBI.

“As huge position-taking by the corporates has the potential of destabilising the market, particularly during periods of uncertainty, the RBI would expect adherence to the spirit of its regulations by such non-bank entities.’’

Companies formerly invested mainly in currency and bond markets for purposes of hedging or cash management, but are increasingly using cash surpluses to trade for profit during periods of weaker earnings from core operations and limited investment opportunities.

Settlements data show companies and pension funds now account for nearly 10 per cent of average daily volumes of Rs.30,000 crore ($4.89 billion) in government bonds. Some days they can even be the most active traders in markets.

That growing influence of companies is stirring discomfort at the Reserve Bank of India, which keeps a close eye on all bonds and currency transactions by banks and is known to call trading desks about deals.

“If we know that a big corporate is selling in the market, that itself sometimes leads to many other banks selling because the ticket size of the corporate is very big,’’ said a senior banker who declined to be identified discussing interactions with the RBI.

“But for a bank, there are more checks and balances from the RBI on big ticket deals.’’

While the RBI regulates market players, including banks and primary dealers, it is unclear if it has similar powers to supervise deals by companies, although central bank officials privately say they believe they have legal standing to oversee any entity trading in debt, currencies, or money markets.

Analysts say RBI supervision would be positive. (The Hindu)