Repo Rollover On The Cards

The Reserve Bank of India (RBI) is set to introduce rollover of ready forward deals (repos) to widen the government securities market.

The move is expected to impart greater leverage to players as with a single security two repo deals can be entered into with the same party counter guaranteeing the whole deal.

In the process, non-banking players such as corporates, mutual funds, institutions will have a better opportunity to manage funds.

According to sources, the guideline permitting rollover of repos will be issued by the RBI in a month. The issue assumes significance as the second stage of the transition of moving towards a pure interbank call/notice money market will be effective from the fortnight beginning June 14.

The move, therefore, is aimed at reducing the dependence on the inter-bank call money market and graduate towards a collateral-based transaction mode from a non-collateral one.

Rollover of repos will be allowed to readyforward contracts entered into both with the Reserve Bank of India and others. This will not require any legal amendment and, further, it will be clarified that this does not amount to short selling.

This is because the rollover will be allowed in the same government security with the same counter party guaranteeing the deal, that is, the Clearing Corporation of India Ltd (CCIL).

However the guideline will have to categorically permit this because as per existing norms, the same security cannot be rolled over unless it is back into the books in physical form after maturity of the former repo deal.

As per the roll over norms to be issued, the earlier repo deal will get rolled over with the same counter party and same security. Sources said this does not amount to short selling where a deal is done with the collateral of a security which has already been pledged for another deal that is yet to mature and the security is yet to the delivered back in physical form.

Moreover it also does not require legal amendments, besides RBI notification, as there is no transfer of title in the deal, sources said. Valuation of the rolled overs will be done through netting of the deals and not in gross for which CCIL is ready with the infrastructure, sources said.