SEBI has relaxed position limits for arbitrage mutual funds, permitting them to
hold temporarily up to 1% of a scheme's assets unhedged. The change aims to
inject liquidity into the closing auction, which has struggled to attract
sufficient participation since its launch on Aug 3. Assets under management in
arbitrage funds stood at 3 tln rupees (USD 31bn) at end-August. Previously,
funds were required to remain fully hedged, limiting auction participation;
under the prior framework price moves in the final 30 minutes created
dislocations between spot and futures that arbitrageurs could close, and the
shortened closing auction narrowed that intervention window, raising the risk of
temporary mismatches.
