RBI caps short-selling in govt securities at 2% or ₹500 crore, tightens trading rules to deepen bond market liquidity

The Reserve Bank of India (RBI) has proposed a calibrated framework for short-selling in government securities, introducing explicit quantitative caps and tightening trading rules as part of a broader push to deepen the sovereign bond market and improve liquidity conditions.

In its draft directions issued on Thursday, the central bank has also sought to widen participation norms in auctions and refine the operational framework for secondary market and “when-issued” (WI) transactions. The proposals come alongside efforts to strengthen monetary policy transmission through a more active term money market and better-linked yield structures.

Short-selling caps defined for bond market participants

Under the draft, the RBI has set firm limits on short positions that eligible market participants can take in government securities. For liquid government securities, short positions will be capped at “2 per cent of the outstanding stock of the Government security, or Rs 500 crore, whichever is higher,” the RBI said.

For other eligible government securities, the ceiling has been fixed at one per cent of outstanding stock or Rs 250 crore, whichever is higher. Treasury Bills, however, have been excluded from short-selling provisions, while central government securities remain eligible.

Short-selling allows traders to sell bonds they do not own with the expectation of repurchasing them later at lower prices, thereby improving price discovery and market efficiency.

Auction participation widened, WI trading streamlined

The RBI has also revised bidding norms in government securities auctions. Scheduled commercial banks and standalone primary dealers can bid for up to 25% of the notified amount, while other eligible participants are capped at 10%.

On When issued (WI) transactions, the central bank has clarified that such trades—entered into for securities announced but not yet issued—“may commence after the issue/re-issue of the eligible Government security is notified and shall cease at the close of trading on the date of auction.”

Settlement will be aligned with secondary market settlement cycles and netted off against trades in the same security, the RBI added.

Push for deeper term money market and unified rules

In parallel, the RBI has proposed enhanced participation in the term money market segment, allowing regulated entities to set prudential limits within board-approved frameworks, subject to exposure norms.

The central bank said an active term money market “helps in enhancing monetary policy transmission by creating a link between the overnight money market and longer-term interest rates.”

It has also consolidated secondary market transaction norms into a single draft Master Direction to simplify compliance and improve clarity for stakeholders.

The RBI has invited comments from banks, investors and market participants on both draft directions by July 17, 2026.