Time for RBI to buy corporate bonds
The Reserve Bank of India (RBI) has been vigorously conducting open market operations (OMO) and purchasing government bonds in the secondary market, to shore up liquidity in the banking system. It conducted OMO for Rs 10,000 crore on Friday and will buy securities worth Rs 30,000 crore later this week, in a bid to arrest the spike in yields seen of late in the commercial paper and corporate bond markets. However, inter-bank liquidity conditions remain comfortably in surplus, to the extent of Rs 2.9 lakh crore, as per RBI data.
As the slowdown worsens, more targeted interventions by the central bank, including those addressing the continuing cash crunch at non-bank finance companies (NBFC), are surely warranted. The RBI needs to directly purchase bonds of large enterprises and leading NBFCs to boost liquidity, the absence of which has affected the growth momentum. The European Central Bank, the Bank of England and the US Fed all set aside a portion of their bond purchases to corporate bonds. This would take care of the transmission problem, too. In her maiden budget, finance minister Nirmala Sitharaman did announce that a Credit Guarantee Enhancement Corporation would be set up to deepen the corporate bond market. The guarantee fund now needs to be actualised. It would help create an active and vibrant corporate bond market here. Also, the law needs to be amended to permit netting, avoiding the higher outlays on gross positions. The world over, financial institutions follow the netting rule.
An active corporate bond market is required for modern arm’s length finance, so as to eschew opaque bank funding for long-gestation projects. We cannot continue with the present system where about 99% of corporate bond issuance is privately placed, and held to maturity. It provides none of the efficiency and transparency gains of a vibrant bond market. In tandem, the high cost of debt issuance needs to be brought down by rationalising stamp duty, developing a liquid market for credit default swaps, and by incentivising public listing.