The Reserve Bank of India (RBI) is working with market regulators on a securities lending product to improve the country’s capital market liquidity and avoid another short-squeeze incident, according to the bank’s deputy governor Shri Kanungo.
Speaking at a joint conference by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) and the Primary Dealers Association of India (PDIA) in Moscow last week, Kanungo said the bank is looking at ways to improve market stability in several ways including by building up India’s fixed income markets.
“The importance of the fixed income markets cannot be overemphasized,'' he told audience members. “Apart from the fact that these markets meet the fund's requirement of the sovereign and sub-sovereign bodies across the globe, they also substantially meet the external fund's requirements of financial as well as non-financial firms.”
Kanungo added that one of the most important prerequisites of a liquid and robust market is wide participation by agents with large volumes of merchandise. In this respect, he noted that banks constitute the single largest set of entities followed by insurance companies, pension funds, along with alternative investment funds.
Currently, he explained, these institutions are sitting on large balance sheets of high-quality assets, such as government bonds, that are not able to be active in the market. As a result, RBI is seeking to enhance the overall liquidity in the government securities market in terms of availability of two-way quotes in less liquid maturities through targeted market-making schemes.
It is also taking steps towards the “activation of a securities lending and borrowing programme, interoperability of depositories for a smooth transfer of ownership in securities”.
Elsewhere, Kanungo used his speech to call on India’s market regulators to assist in developing the country’s interest rate markets.
“For instance, short selling activity could benefit if a wider pool of securities lenders can be developed,” he added. “Insurance and pension funds, mutual funds have significant holdings of government securities that could be lent to short sellers.”
“This would avoid short-squeeze incident we saw a couple of years back, apart from generating income for these entities. We are working with regulators to develop a securities lending product that could enable these entities to participate in securities lending.”
For India, government securities constitute the largest segment of its fixed income market, standing at roughly INR 58 trillion $806.7 trillion, with treasury bills accounting for another INR 6 trillion ($83.4 trillion), according to Kanungo.
Meanwhile, the country’s corporate debt market has grown from INR 14.43 trillion ($200.7 billion) to INR 30.63 trillion (USD 344.7 billion) from June 2014 and June 2019.
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