Tuesday, October 17, 2006

Short-selling in guilts to return

Unlike stocks there is no futures and options market in bonds, which makes hedging restrictive and expensive. Therefore, the RBI is planning to allow ‘covered’ short-selling.

What this means is: In order to deploy extra cash or borrow in the short-term banks and primary dealers cut repo (repurchase obligations) deals with each other. Under this, the lender gives Rs. X and accepts securities from borrower, and then reverses the transaction to return the securities and receive Rs. X plus Y from the borrower.

This can be an overnight deal, and can be as long as a fortnight.
A T+5 short-selling in government bonds is expected to make the market more robust, and allow room for contrarian views.