MC Explains | What is borrowing and lending in G-Secs?

Money market dealers said that the new norms of borrowing and lending against government securities will prompt more people to take short positions in the market. (Representative image.)

In the monetary policy meeting on February 8, the Reserve Bank of India (RBI) proposed allowing borrowing and lending of government securities (G-Sec), which will add depth and liquidity to the bond market and aid efficient price discovery.

The central bank said it would soon issue draft directions separately for stakeholder comments.

Here is an explainer that will help understand the process.

The central bank’s proposed norms will allow entities to borrow or lend against government securities. This will benefit entities such as insurance companies and pension funds, which are not allowed to engage in such activities currently.

Further, G-Secs held by insurance companies and mutual fund are not available for short sellers to cover shorts.

The proposed development will allow G-Sec holders to deploy idle G-Secs to generate higher returns. Mutual Funds and insurance companies will be able to participate.

The central bank has said that this would add depth and liquidity to the G-Sec market, aid efficient price discovery, as also aid the market borrowing programme of the centre and states.

“The system is expected to facilitate wider participation in the securities lending market by providing investors an avenue to deploy idle securities and enhance portfolio returns,” the RBI release said.

Also read | RBI proposes borrowing, lending of government securities

As per RBI Deputy Governor T. Rabi Sankar, lending and borrowing  of securities can be done in many ways, one of which is through the repo markets, which happens even today.

"But some entities like insurance companies are not permitted to borrow against G-Secs, and they have a lot of G-Secs. So, allowing lending and borrowing directly against securities, and not just through the repo market, will enable them to lend,” he said in a post policy press conference.

Money market dealers said that the new norms of borrowing and lending against government securities will prompt more people to take short positions in the market.

This will ease short covering of G-Secs, resulting in better price discovery and enhancing depth in the G-Sec market.

“Short selling is part of the market. We have allowed short selling a long time ago. So it's part of the market. But what we are trying to do is to encourage depth and liquidity and price discovery in the market,” said RBI deputy governor Michael Debabrata Patra.

Also read | MC Explains: What is QR Code based coin vending machine? All you need to know

The central bank has not specified any date or timeline for the proposed decision. But it said it will shortly issue draft directions separately for stakeholder comments.