RBI has allowed custodians or banks to short-sell in the government bond market

MUMBAI: The Reserve Bank of India has allowed custodians or banks to short-sell in the government bond market with primary members or individual bank customers, who invest through lenders, holding a kind of depository account with the central bank, a move aimed at drawing retail participation.

So far, institutions mostly invest in sovereign securities market. More investments from retail investors are expected to add more liquidity in the secondary market.

"A custodian may undertake a short sale transaction with its general account holder (GAH) within the permissible short sale limits," the central bank said in a notification.

"A custodian may put through a cover transaction with a GAH to square a short sale transaction in the related security undertaken with a market participant other than its GAHs."

In government debt market traded securities are kept with the RBI. In market parlance, it is known Constituent Subsidiary General Ledger. Banks hold it with the central bank. They can maintain another such account for their own customers or GAHs, who too invest in gsecs through it.

"RBI is now opening up," said Ashutosh Khajuria, ED and CFO of Federal Bank. "By allowing custodians to short sell with their gild account holders, it will help enhance liquidity as banks were only buying from them earlier, not short-selling."

Scheduled commercial banks and primary dealers (PDs) or bond houses are currently permitted to execute the sale leg of short sale transactions in the over the counter (OTC) market.

Short sale in the OTC market was not permitted between the primary member and its gilt account holder.

In its September monetary policy the central bank proposed to allow such short sale.