The Reserve Bank of India (RBI) has proposed to allow non banks like insurance companies and pension funds to lend and borrow government securities, which it said will add depth and liquidity to the bond market and aid efficient price discovery.
The new norms will essentially allow entities to borrow and lend government securities by paying or receiving a premium. The central bank will soon issue draft directions separately for stakeholder comments. Dealers said the new norms will make more people eligible to take a short position on government securities.
“Though it will not have any immediate impact on the market, there will be more participants who can take a short position on government bonds when yields are rising. One will have to wait for the guidelines to know exactly what they allow but more participants does not mean that the market will get deeper overnight. This has been a long pending demand from the market,” said Naveen Singh, head, fixed income trading at
Primary Dealership.
A short position refers to a trading technique in which an investor sells a security with plans to buy it later. Shorting is a strategy used when an investor anticipates that the price of a security will fall in the short term. Bond prices and yields move in opposite directions.
RBI said allowing lending and borrowing of government securities to more market participants will provide investors an avenue to deploy idle securities and enhance portfolio returns.
Some bankers said it will be interesting to see if the central bank allows companies also to participate. “There have been companies which have been coming to us asking to trade in government bonds. If they allow companies then it could open up another area to trade in the short term,” said a private sector banker.
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