The move is not exactly short-selling of G-secs, but will allow intra-day squaring-off of market transactions, which was not permitted earlier. This will improve market liquidity, a senior official from Clearing Corporation of India Ltd (CCIL) told FE.
Settlement risk will be lower as selling is permitted, provided the contract is either guaranteed by an approved central counter-party like CCIL, or the counter-party thereof was the RBI.
This is a very positive move. Currently, there is a cooling period of one day, which means that the market participant cannot sell the securities purchased on the same day. This is also expected to provide further fillip to the repo markets, said Kotak Mahindra Asset Management Company director C Jayaram.
Other market participants also believe that the move would lead to increased activities in the market as it provides an efficient hedging mechanism and extra flexibility in the market. However, some of the participants doubt that it would translate into higher volumes in the short or medium term.
To do squaring-off offered by the new mechanism would require a quick and timely decision and a majority of participants in the market are not equipped with that decision-making environment, said an analyst.
At present, the wholesale debt market segment of the National Stock Exchange (NSE) has a turnover of about Rs 6,000 crore.
This will help further development and deepening of the G-Sec market, said a private banker and added the settlement risk is also low with most of the transactions in G-Secs now settled through CCIL, which also guarantees the settlement.
To facilitate operationalisation of the proposal, the settlement of G-Secs transactions would be switched over to the DVP III mode. There will be a review of the working of the arrangements every month to consider modifications and continuance, as appropriate, RBI said in its policy statement.
RBI has taken a number of measures to further develop and deepen the G-Sec market. These include permission to gilt account holders to participate in repo market, issuance of guidelines for uniform accounting norms for repo and reverse repo transactions, facility for trading in the anonymous screen-based, order-driven system of stock exchanges and introduction of exchange-traded interest rate derivatives on the National Stock Exchange (NSE).