RBI permits re-repo of government securities to improve bond market liquidity
“Re-repo will enhance the ability of lenders to lend in term repo market for a longer period of time,” said Neeraj Gambhir.
By ET Bureau | Updated:
MUMBAI: The Reserve Bank of India (RBI) gave the financial markets a leg up on Tuesday by permitting re-repo of government securities and raising the limit on shorting of bonds, measures that could improve the lending ability while enhancing liquidity and managing volatility in the market.
“Re-repo will enhance the ability of lenders to lend in term repo market for a longer period of time,” said Neeraj Gambhir, head of fixed income and managing director, Nomura Research.
Lenders are usually averse to lending for longer tenure and prefer overnight lending due to uncertainty in their cash flows. This facilitates lenders’ liquidity management as well. “With this move, they should feel more comfortable to lend for longer term,” he said.
For instance, if a liquidity-surplus lender has lent funds for 15-days in term repo but suddenly needs liquidity due to credit demand, with the RBI’s latest decision, they can now use the pledged securities obtained from term repo lending to borrow money.
RBI is expected to come out with detailed notification on this at a later stage, which will throw more light on where those lenders can borrow by pledging securities. The RBI permits rerepo of government securities subject to appropriate control measures and development of IT infrastructure.
The central bank has also allowed banks and primary dealers higher limits for short sales in liquid government bonds to 0.75% from 0.50% of their individual portfolio holdings, or Rs 600 crore, whichever is lower. For illiquid securities, they can short 0.25% of the outstanding stock of each security.
Besides, the Reserve Bank has extended reporting timings on trade data and an option for T+2 settlements for secondary market OTC trades in government securities for such investors. The format suggests settlement in two days instead of one day, or T+1.
“These short sales will help deepen the G-sec market while creating demand for weekly RBI auctions,” said Sandeep Bagla, associate director, Trust Group.
“Re-repo will enhance the ability of lenders to lend in term repo market for a longer period of time,” said Neeraj Gambhir, head of fixed income and managing director, Nomura Research.
Lenders are usually averse to lending for longer tenure and prefer overnight lending due to uncertainty in their cash flows. This facilitates lenders’ liquidity management as well. “With this move, they should feel more comfortable to lend for longer term,” he said.
For instance, if a liquidity-surplus lender has lent funds for 15-days in term repo but suddenly needs liquidity due to credit demand, with the RBI’s latest decision, they can now use the pledged securities obtained from term repo lending to borrow money.
RBI is expected to come out with detailed notification on this at a later stage, which will throw more light on where those lenders can borrow by pledging securities. The RBI permits rerepo of government securities subject to appropriate control measures and development of IT infrastructure.
The central bank has also allowed banks and primary dealers higher limits for short sales in liquid government bonds to 0.75% from 0.50% of their individual portfolio holdings, or Rs 600 crore, whichever is lower. For illiquid securities, they can short 0.25% of the outstanding stock of each security.
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Besides, the Reserve Bank has extended reporting timings on trade data and an option for T+2 settlements for secondary market OTC trades in government securities for such investors. The format suggests settlement in two days instead of one day, or T+1.
“These short sales will help deepen the G-sec market while creating demand for weekly RBI auctions,” said Sandeep Bagla, associate director, Trust Group.
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