An active debt market calls for proactive policy, and the Reserve Bank of India’s (RBI) move last week to liberalise investment criteria for foreign portfolio investors (FPI) in government securities and corporate bonds is welcome.
The minimum residual maturity period of three years has been dropped, the cap on aggregate FPI holding of G-secs raised from 20% to 30%, and that for corporate bonds increased to 50%. The move clearly seeks to boost capital inflows at a time when outflows loom large.
To overtly encourage such inflows, especially shortterm inflows, is questionable, as they can easily reverse, skew the exchange rate and have other macro-prudential implications. It is true that the new rules stipulate that while FPIs can now park funds in G-secs of residual maturity below one year, no more than 20% of the funds can be assigned to such short-term instruments.
For corporate bonds, the minimal residual maturity criterion is now above one year. The fact is that higher bond yields have led to much marked-to-market losses for bond holders of late, and inflow of FPIs in the bond market has stemmed.
The new norms clearly seek to boost capital inflows. Besides, marked-tomarket losses are less likely for shortterm bonds. But there remain a host of rigidities in the domestic bond market, and what is required is holistic policy for transparent, arm’s-length finance and reduced reliance on bank funding for long-gestation projects.
Notice that the repo (repurchase obligations) market for corporate bonds continues to be very limited here, due to non-availability of guaranteed settlement, the lack of a global master repo agreement and the absence of an electronic dealing platform.
Further, the credit default swap market, which provides insurance against bond default, also remains stunted, although the RBI move last month to allow interest-rate swaptions should improve matters. There are still other rigidities like non-uniform valuation norms, varying stamp duties and the like, and the RBI needs to begin liquidity adjustment facility in corporate bonds to boost demand.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
via More work for an active debt market