The Hindu Business Line : Banks seek RBI nod to short sell securities

Banks are pleading with the Reserve Bank of India for permission to sell `short' - selling what they don't possess as yet- Government securities that are not yet issued by the RBI in the first place.

Banks are seeking this facility under an arrangement where the RBI invites bidders to quote for securities that would soon be issued, but the bids themselves could be made on a `when issued' basis and hence the expression, `when-issued' market.

It has been five months since the `when-issued' market for trading in Government securities ahead of auctions, came into being. Yet, the volumes in the `when-issued' market have been low with participation restricted to just three primary dealers and one or two banks.

Nine securities have been auctioned till date and the total traded volumes in the when-issued market was Rs 1,025 crore. Volumes have varied between a low of Rs 5 crore and a high of Rs 295 crore per security. But in the actual auction for these securities, the RBI managed to sell securities worth Rs 4,000-5,000 crore.

Clearly, if the idea of a `when-issued' market was to allow a period of time for investors and the RBI too, to discover over a period of time, the price for the securities that are on offer, that has not been met, if the lukewarm response is anything to go by, say bankers. They attribute this to the lack of active participation by banks that are denied the privilege of selling these securities `short', on par with Primary Dealers (PDs).

"According to RBI's guidelines, banks can only sell and buy through a primary dealer. So, the PDs have an edge over banks in the when-issued market," said Mr R.V.S. Sridhar, Head-Treasury, UTI Bank. A number of banks are not traders and hence refrain from the `when-issued' market, he added.

`Two-way market'

"There should be a two-way market, with a buyer and a seller, otherwise the risks are too high. In the US, primary dealers have to underwrite the whole auction and since they are big players who have the muscle power, the traded volumes are high in the when-issued market," said the treasury head at a private bank.

Bankers say that Indian primary dealers are not adequately capitalised and are not making profits. "Unless PDs become more powerful and there are a larger number of players who have the underwriting ability, there will be no incentive to trade in the when-issued market. There is more comfort in directly buying in the auction," said a senior treasury official.

According to sources, banks have held several discussions with the RBI and the Fixed Income Money Market and Derivatives Association for permission to go "short" (only PDs can go short) in the when-issued market. Market participants say that giving banks the right to go short will increase interest in the `when-issued' market.

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