The Reserve Bank of India will allow banks to borrow and lend government bonds in a move that could add depth and liquidity to the market, the central bank chief said on Wednesday.
The move could facilitate wider participation in the
securities lending market by providing investors an avenue to
deploy idle securities and enhance portfolio returns, RBI
Governor Shaktikanta Das said in his monetary policy address.
Bond market participants expect the facility to benefit
insurance companies and mutual funds, even as they wait for the
detailed draft directions to be issued separately.
Mutual funds are allowed to borrow only to meet
redemptions while life insurance companies are not allowed to
borrow at all, a senior member of the treasury team at a
Mumbai-based private bank said on Reuters Trading India.
The introduction of lending and borrowing in government
bonds will curb the volatility in liquidity, said Nilesh Shah,
managing director at Kotak Mahindra Asset Management Company.
Some market participants said this move could aid short
sellers, who run the risk of getting squeezed if they can't get
the securities through the CROMS trading platform for g-secs.
"Shorters will get more avenues to get bonds, and this
should minimise the risk of getting squeezed, which leads to
exaggerated price moves," a trader with a private bank said.
(Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)
