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RBI allows trading in repo of G-Sec contracted for sale

The move comes in the wake of the severe liquidity crunch in the banking system with banks borrowing over Rs1 trillion every day from the special liquidity window on one hand and the increasing government borrowing on the other

Mumbai: The Reserve Bank of India (RBI) on Monday said the repurchase or repo of government securities (G-Secs) that have been contracted for sale will be allowed for transaction as a measure to improve liquidity in the G-Sec market, reports PTI.

“It has now been decided to permit repo of G-Secs (on T+0 basis) that have already been contracted, for sale, for transaction,” an RBI notification said.

The move comes in the wake of the severe liquidity crunch in the banking system with banks borrowing over Rs1 trillion every day from the special liquidity window on one hand and the increasing government borrowing on the other.

The Centre has overshot its market borrowing target by nearly Rs1 trillion (Rs93,000 crore) this fiscal from the budgeted Rs4.17 lakh crore. Already as of end December, the government had borrowed a tad over 92% of its planned borrowing target, according to RBI data.

Last Saturday, RBI deputy governor Subir Gokarn, while denying the increased use of open market operations as a way to help the government borrowing programme, said the central bank will use more OMOs to infuse liquidity into the system.

This is despite the fact the on 24th January, RBI had cut the CRR requirement by 50 basis points (bps), thus releasing Rs32,000 crore into the system daily. The RBI has done OMOs worth nearly Rs90,000 crore so far since November.

“The aggregate objective of OMOs is to put in a certain amount of liquidity into the market and not help the government borrowings,” Mr Gokarn had said, and "the choice of securities is driven by the need to be reasonably certain about achieving the aggregate number.

Earlier, to improve liquidity in the G-Sec market and reduce the price risk on the part of market securities, the RBI has allowed transaction when a sale of G-Sec already contracted for purchase had been entered into by parties.

However, the central bank notification said the contract agreement should be confirmed prior to the transaction and be guaranteed by Clearing Corporation of India or the security is contracted for purchase from the RBI itself.

Previously, any transaction in a G-Sec is allowed only if the party or dealer actually holds that security in its portfolio.

But, now the dealers will be able to transact in a G-Sec if he has entered into a contract for sale or repurchase without actually holding that security at the time of trading.

In another notification, the regulator has modified the monthly report on short-selling to capture the changes in the regulatory changes during the month.

Further, the monthly report on these transactions shall be submitted to the Financial Markets Department by 8th of every month, it added.

 

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