PDs unenthused by extra time on short-sale cover

MUMBAI: The Reserve Bank of India’s move to rekindle interest in the repo or repurchase market by extending the time limit for covering a short-sale to three months, from five days now, has failed to enthuse dealers who felt the move was cosmetic and that the short-selling limit should have been raised instead. Unlike in other assets, RBI does not permit naked short-selling of government securities.

The move is expected to develop the term repo market which lay dormant because of the short time span for covering short of repo instruments. It will help in pricing of the illiquid, short-tenure interest rate futures paper. “The existing period of five days for shorting was not long enough to encourage players to take short positions in large volumes in the G-sec market. This move should increase investor appetite with the given flexibility ,” said Morgan Stanley Primary Dealership executive director Manoj Swain.

However, some are not convinced that extending the time limit will deepen the market as short positions are not left outstanding by primary dealers. “The short-selling limit has not been changed. These investments are covered, nobody keeps these investments naked. We will have to see how this move pans out and what kind of interest it draws. This should help deepen the term repo market,” said STCI Primary Dealership managing director Pradeep Madhav.

RBI has also extended the delivery versus payment facility, which is the net settlement of security and cash, to gilt account holders who maintain their balances with the custodian bank or primary dealer. Earlier, the facility was only open to banks and primary dealers , who held constituent subsidiary general ledger, or CSGL, account with RBI. Primary dealers think these moves, though structural in nature , would help bring in volumes .