This triggered panic, as foreign and private banks had created a huge short position after the central bank kept its policy rates unchanged in February. Bond yields had moved up from 6.4 per cent to 6.95 per cent in one month and PSBs feared loss on their bond portfolio ahead of the financial year's closing.
Angry, they refused to sell bonds to the short-sellers to cover their positions. The short-sellers had to do so by buying bonds at steep rates. Bonds rallied but the situation continued for two days. At which point, RBI started intervening through calls to the treasury rooms of various banks, to release bonds in the market.
The situation normalised soon after. And, all banks got an 'advisory' from the central bank. Subsequently, senior RBI officials overseeing bond and currency operations met treasury heads of banks. And, impressed upon the need for creating specialist positions where employees could work for at least seven-eight years and grow in the division till the rank of general manager. There was no formal communication in this regard.
The Reserve Bank had very recently, in late 2015, widened the short-selling space. Naked short-selling is still not allowed but banks can short their positions, after overcoming several restrictions. For example, they must have a subsidiary general ledger with RBI for traded securities. But, so far, there was no incidence of short-sellers moving the market. This time, it did. And, the market got divided between PSBs which went long and foreign banks that shorted.
According to bankers, RBI is a bit concerned about short-selling but that doesn't mean it would allow banks to 'gang up'. Beside, there is a limit as to how much a bank can short, and as long as the short-selling is within that limit, there is nothing wrong.
"In the meeting, RBI officials wanted to impress that using all types of legally allowed instruments is perfectly permissible. RBI also felt it is the lack of experience of some public sector treasury heads about things related to markets that led to the collusion. Hence, RBI suggested creating of people dedicated in these disciplines, so that they get well familiasized with the game," said a senior banker who was present.
According to another banker, RBI has for long been telling banks to create specialist positions and nurture these. However, PSBs have some compulsions. There is first the relatively low pay. Any experienced dealer can easily get lured away by private and foreign banks, offering a higher package. Hence, retaining of specialists is a major challenge. Second, a posting in the treasury department is seen as part of an all-round training process. In a PSB set-up, if a person doesn't have knowledge in all aspects of banking, especially core areas (and treasury isn't necessarily considered one), getting a promotion to higher management position is difficult. There are few instances of treasurers getting the top post of a bank.
However, PSBs say, they are creating specialist positions and willing to give them market-related compensation. For example, State Bank of India (SBI) recruits specialists for certain roles on a contractual basis; it pays them on a cost-to company basis, not through the traditional payroll structure of the bank. Recently, when SBI offered voluntary retirement schemes to the employees of associate banks, it barred specialists, bond and currency dealers from availing of it.