The government securities and foreign exchange markets are set to get a big boost with the Reserve Bank of India expected to announce a series of measures aimed at providing more liquidity and depth to the markets.
Banking sources said the measures may include permission for corporates to trade in rupee currency options. Currently, corporates are only allowed to hedge their foreign currency exposure through these instruments. Currency option is a derivative product used to hedge risks.
Options are a type of derivatives, which simply means that their value depends on the value of an underlying investment. In most cases, the underlying investment is a stock, but it can also be an index, a currency, a commodity or any number of other securities.
The other measures likely to be announced by the RBI are introduction of the when-issued market, active consolidation of government securities and a further push to short selling in government securities.
These measures on government securities markets have been recommended by an internal technical group set up by the apex bank.
The government proposes to buy back large-sized illiquid central government securities from the market and issue a smaller number of liquid securities.
This will enhance the outstanding floating stock of liquid securities. Gradually, the active consolidation could be extended to state government securities which are highly illiquid in nature, said the banking sources.
At present, the holders of state government securities are unable to liquidate the huge stock of such illiquid securities and are forced to hold them till maturity.
Guidelines on when-issued market are likely to restrict the mechanism to only members of the negotiated dealing system, and may require a primary dealer to be one of the counterparty, to start with.
The when-issued market is the trading in those government securities, which are put on the block by the government to be auctioned for raising money.
The trading happens just after the auction is announced based on expectation of price at which the the market will bid for the paper. The WI market may start soon in the first quarter of the current financial year.
It helps in better price discovery for the paper and facilitates better distribution of the paper among the market participants before the auction.
Thus, it reduces the risk carried by a primary dealer who holds the unsubscribed portion in its book till the time it is sold in the secondary market.
Further, trading in the when-issued market may commence on the day after the announcement of the government securities auction and would cease immediately on declaration of the auction results.
Primary dealer is an entity who acts as a market maker for the government by subscribing to government securities in the auction along with other players and even underwrites the amount which remains unsubscribed.
The Centre will also come out with roadmap for implementing the three stages of short selling of the government securities. At present, only intra-day short selling of the government securities is allowed. In later stages, money market players will be allowed to maintain open short-selling positions.Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Investments Discussion Group
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