In a significant development for the Indian financial market, the Reserve Bank of India (RBI) has implemented the Government Securities Lending Directions, 2023. This directive, effective immediately as of December 27, 2023, marks a major step in the central bank’s efforts to deepen the bond market in the country.
The initiative for the lending and borrowing of government securities, also known as G-Secs, was first introduced in February 2023 when the RBI released draft norms for such transactions. These norms were aimed at expanding participation in the securities lending market, an essential factor for a robust and dynamic financial system. Following a period of consultation and feedback from banks, market participants, and other stakeholders, the RBI finalized and issued these directions.
Under these directions, government securities issued by the central government, excluding Treasury Bills, are eligible for lending and borrowing in Government Securities Lending (GSL) transactions. Additionally, both central and state government securities, including Treasury Bills, can be used as collateral in these transactions.
The initiative is expected to significantly enhance the liquidity of government bonds, especially considering the substantial holdings of such bonds by insurance companies. The introduction of a well-functioning market for securities lending and borrowing is anticipated to contribute to more efficient price discovery, operational efficiency, and wider participation in the securities lending market.
Key aspects of the GSL transactions include a minimum tenor of one day and a maximum period as prescribed for covering short sales. The RBI’s move is expected to augment the existing market for ‘special repos’ and provide investors an opportunity to deploy idle securities, thereby enhancing portfolio returns.
This development represents a critical step towards a more liquid and efficient bond market in India, offering a range of benefits for various market participants.