MUMBAI: Market intermediaries are likely to face a liquidity squeeze in the near term after the Reserve Bank of India’s (RBI) tighter lending norms come into effect from July 1. Industry estimates suggest the measures could impact market liquidity by ₹50,000-₹60,000 crore and significantly raise the impact cost for foreign portfolio investors (FPIs) and mutual funds.
Consequently, leverage among market intermediaries will get curtailed and make liquidity provision more capital intensive.
According to Ketan Marwadi, member of the Commodity & Capital Market Participants Association of India (CPAI), around ₹50,000 crore of liquidity could be affected once the new norms are implemented. He said clearing corporations have around ₹11 lakh crore in collateral, including nearly ₹1.2 lakh crore through bank guarantees and around ₹1 lakh crore through intra-day facilities.
Another member of a brokers’ forum estimated the impact could be closer to ₹60,000 crore.
In February, the RBI tightened rules for banks lending to liquidity providers, mandating that all such lending must be fully secured with 100% collateral. Earlier, brokers could partially rely on promoter or corporate guarantees. The central bank also increased the haircut to 40% on equities accepted as collateral.
“Lending rates for liquidity providers may rise, but we need to wait for a few quarters to assess the real impact,” a senior broker association member said. Leverage in the market is already declining, with more investors shifting towards cash delivery-based trades, the person added.
The move is expected to further pressure derivatives players, who have already been impacted by the increase in securities transaction tax (STT) introduced in April. Some experts expect derivatives volumes to decline 10-15% in the near term, making the segment the worst hit, followed by intra-day leveraged traders.
Cash market participants are expected to see a relatively lower impact as liquidity in the segment is supported by domestic investors, mutual funds, pension funds, foreign investors and insurance companies.
Market participants, including stockbrokers, clearing members, custodians and arbitrageurs, provide liquidity and also undertake proprietary trading in the equity cash and derivatives segments. However, this role is not formally recognised by the Securities and Exchange Board of India (Sebi).
Recently, CPAI and other broker associations sought a structured framework to recognise liquidity providers. The industry argued that a 100% collateral requirement effectively treats liquidity providers on par with speculative traders.
“An LP (liquidity provider) keeping markets stable is being penalised the same way as a risky speculative trader — simply because there is no official Sebi recognition for what they do,” CPAI said in its submission to the Industry Standards Forum (ISF).
The industry has proposed that liquidity providers continue with a 50% collateral requirement while maintaining portfolio risk analysis below the prescribed threshold to ensure banks are protected.
If the ISF approves the proposal, it will be considered by Sebi and its Secondary Market Advisory Committee. Following their approval, the RBI may examine the introduction of an appropriate legal framework.
Source: The Financial Express
