RBI to extend short sale period of G-sec to 3-months

Mumbai: The Reserve Bank of India said that it has proposed to extend the period of short sale in the Central Government securities from the present five days to the maximum of three-months.

The move will provide a fillip to the interest rate futures market and the term repo market, the Reserve Bank said in its monetary policy statement for FY 12.

Intra-day short selling in Central G-sec was permitted in February 2006 based on the recommendations of the Technical Group on the Central Government Securities Market.

In January 2007, based on the feedback received, the period of short sale was extended to five days. The apex bank now proposed to extend the period of short sale to a maximum period of three months.

The RBI also said that FIIs would now be allowed to cancel and rebook up to 10 per cent of the market value of the porfolio as at the beginning of the financial year.

Presently, FIIs are permitted to cancel and rebook two per cent of the market value of the portfolio as at the beginning of the financial year.

The move is in response to the large positions held by the FIIs and considering the increased depth of the Indian forex market to absorb the impact on the exchange rate, the RBI said.

Detailed guidelines on this would be issued separately, the policy statement said. In another move to prevent systemic risk in times of stress/liquidity crunch, the RBI said that investment by banks in liquid schemes of debt-oriented mutual funds will be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year.

Stating that it felt it prudent to place certain limits on banks' investments in debt-oriented mutual funds, the RBI said that "Investment in liquid schemes of DoMFs (debt oriented mutual funds) by banks will be subject to a prudential cap of 10 per cent of their net worth as on March 31 of the previous year."

However, with a view to ensuring a smooth transition, banks with investments in DoMFs in excess of the 10 per cent limit, will be allowed to comply with this requirement in six months' time, it said.

According to the RBI, banks' investments in liquid schemes of DoMFs have grown manifold and liquid schemes continue to rely heavily on institutional investors such as commercial banks whose redemption requirements are likely to be large and simultaneous.

DoMFs, on the other hand, are large lenders in the overnight markets such as collateralised borrowing and lending obligation (CBLO) and market repo, where banks are large borrowers. DoMFs invest heavily in CDs of banks.

"Such circular flow of funds between banks and DomFs could lead to systemic risk in times of stress/liquidity crunch," the RBI said, adding hence the prudential cap of 10 per cent is being imposed.

Source: Financial Express