The Reserve Bank of India's (RBI) recommendations on changes in bond and forex markets are likely to open up currency markets in India.
The central bank measures announced for the development of corporate bond and currency markets cover holistically all aspects of market development, such as market regulations, participants and instruments.
The RBI has proposed, in line with global standards, to cap banks’ exposure limit to any group of connected counterparties at 25 per cent of tier-1 capital against the current limit of 40 per cent.
This may force corporates with large exposure to bank finance to turn to the bond market. To facilitate this move, the RBI has raised partial credit enhancement limit of the bond size, which can be underwritten by corporates up to 50 per cent of the issue; thus it helps credit-rating for bond issues of corporates directly.
In addition, corporates can also hedge to any market (Over The Counter or Exchange) with any of their permissible products. The currency market move was aimed at improvement of liquidity with an open position in the forex market to hedge further.
In consultation with the Securities and Exchange Board of India (SEBI), electronic platforms will be put in place to develop the repo market in corporate bonds, which will bring more transactions to exchanges from OTC markets.
|The RBI is also planning to lift restrictions on transfer of government securities between depositories and the central bank. (Photo credit: Reuters)|
Investor banks will also have the benefit of lower risk weights since counterparty clearances will be happening centrally without any time restrictions or time lag. Now listed companies can lend through the repo market without any tenor or counterparty restrictions of seven-day window anymore.
The participants in bond repo now include even authorised market brokers, apart from banks, mutual funds, insurance companies and market dealers (primary dealers).
This is hoped to help in meeting funds and security requirements of authorised dealers/brokers who are encouraged to be market makers of the repo bond market in the future.
The direct access proposal to bond trading platforms by foreign portfolio investors (FPIs) for the government and corporate papers will further widen the investor base. The RBI is also planning to lift restrictions on transfer of government securities between depositories and the RBI, as well.
To develop the market for masala bonds and to provide additional avenues to banks to raise capital, the RBI is going to allow banks to issue perpetual debt instruments (PDIs) qualifying for tier-1 capital, and debt capital instruments (DCIs) qualifying for inclusion in tier-2 capital on lending for infrastructure and housing development.
All the above measures when put together can yield positive dividends, provided all other regulatory bodies like the SEBI, Insurance Regulatory and Developmental Authority and Pension Fund Regulatory and Development Authority also decide to walk the talk with the RBI.
These positive measures of RBI from the unfinished agenda of former governor Raghuram Rajan, coupled with the eagerly awaited bankruptcy code in place, should help witness a wide open currency market that will have a heart-warming impact on the Indian corporate debt market soon.