Five-day extension on short sales a breath of fresh air for gilts

MONETARY POLICY MID-TERM REVIEW 2006-07/ DEBT MARKET

Banks and primary dealers can now cover short positions within an extended period of 5 trading days.

The government securities market is expected to deepen further with the Reserve Bank of India (RBI) allowing short-selling for an extended period.

Banks and primary dealers can now cover their short positions within an extended period of five trading days, against intra-day short-selling which was permitted in February 2006 on the basis of the recommendations of a technical group on the central government securities market.

Intra-day short-selling failed to excite players and there was hardly any activity. RBI said short-selling has been allowed beyond the intra-day settlement cycle on an assessment of the market feedback.

As the extended short-selling may result in banks carrying short positions across settlement cycles, they would be allowed to deliver a shorted security by borrowing it through the repo (repurchase) market.

The central bank, as part of efforts to develop financial markets, has now extended the permission for "when issued" trading to fresh issues of central government securities on a selective basis. When issued market for reissuable securities had commenced in August 2006.

When-issued trading involves short-selling of securities which have not yet been issued by the government.

To increase the number of actively traded government securities and, thereby, enhance liquidity and improve pricing in the market, the RBI is working out modalities of consolidation of certain government securities in consultation with the government. RBI had in the annual policy statement in April 2006 stressed the need for such a move.

RBI has been seeking inputs from the Technical Advisory Committee (TAC) on money, foreign exchange and government securities markets for further development of the financial markets. The RBI reconstituted the committee in June, 2006.

The TAC would now meet as often as it is required but at least once in a quarter, to review and recommend measures for deepening and widening the money, foreign exchange and gilts market, including those relating to participants, products, institutional and infrastructural arrangements, the central bank said.

---

OPENING UP

RBI said short-selling has been allowed beyond the intra-day settlement cycle on an assessment of market feedback

The banks would be allowed to deliver a shorted security by borrowing it through the repo market

Extends permission for "when issued" trading to fresh issues of selective central government securities