RBI proposes draft norms for lending and borrowing of government securities to expand market participation

The report highlights that supply responses and cost conditions are poised to improve, even though inflation witnessed a rebound in January.

The report also acknowledges the government's efforts to boost the economy through the Budget 2023-24's emphasis on capital expenditure. The bulletin expects this to crowd-in private investment, strengthen job creation and demand, and raise India's potential growth.

RBI has released draft norms for the lending and borrowing of government securities, aimed at expanding participation in the securities lending market. The proposed introduction of securities lending and borrowing in government securities (G-secs) will allow investors to deploy idle securities and increase portfolio returns.

According to the draft RBI (Government Securities Lending) Directions, 2023, Government Securities Lending (GSL) transactions must be carried out for a minimum of one day and a maximum of ninety days. The RBI has invited comments from banks, market participants, and other interested parties by March 17, 2023.

The draft specifies that government securities issued by the central government, excluding Treasury Bills, would be eligible for lending or borrowing under a GSL transaction.

Additionally, government securities issued by the central government, including Treasury Bills, and state governments would be eligible for placing as collateral under a GSL transaction.

Entities that are eligible to undertake repo transactions in government securities, as well as any other entities approved by the Reserve Bank, would be eligible to participate in GSL transactions as lenders of securities.

The RBI's move is aimed at enhancing market liquidity and efficiency, improving the depth and breadth of the market, and attracting new participants, according to a statement released by the central bank.

"The introduction of securities lending and borrowing in government securities will provide a mechanism for market participants to optimize the use of their holdings of government securities," the statement said. "The proposed framework is expected to promote efficient price discovery and improve liquidity in the secondary market."

The RBI's latest move comes as part of its ongoing efforts to improve the Indian securities market and enhance investor participation. The central bank has previously taken several steps to enhance the liquidity of the market, including reducing the reserve requirements for banks and introducing measures to boost the depth and breadth of the government securities market.

The introduction of the proposed framework for securities lending and borrowing in government securities is expected to further strengthen the Indian securities market and attract new participants, leading to greater market efficiency and liquidity. The RBI is expected to release the final norms for GSL transactions after considering feedback from stakeholders.