Get on With Corporate Bond Purchases, RBI–Economic Times

Reserve Bank of India (RBI) needs to shore up liquidity in the financial system. True, RBI has been boosting liquidity lately, with repurchase obligations (repo) in government securities of the order of Rs 1 lakh crore slated in March. But while abundant liquidity in the banking system is necessary, it is certainly not sufficient. The central bank has to be ahead of the curve and duly step-up repo in corporate bonds. Notice the rising redemptions in the mutual funds (MF) industry of late, with assets of over Rs 28 lakh crore — the outflows now add up to Rs 50,000 crore daily. Hence the need to boost liquidity for MFs with a repo window for corporate bonds and commercial paper.

Amfi, the Association of Mutual Funds in India, is reportedly seeking substantial liquidity injection via repo in corporate bonds; RBI needs to concur. RBI also needs to consider directly subscribing to bonds of large corporates and non-banks. Meanwhile, the tri-party repo order-matching platform, Treps, on which corporates and non-banks trade their surplus liquidity, now has central counterparty clearing albeit as late as November 2018. But the tri-party segment remains restricted to AAA-rated bonds. Finance minister Nirmala Sitharaman, in her maiden budget in 2019, did propose that AA-rated bonds also be allowed as collateral.

It must progress from promise to reality. In tandem, we need an enabling framework for an active and vibrant corporate bond market, including liquidity in insurance products like credit default swaps and routine scope for ‘netting’ financial exposure with counterparties.

Note that the bonds of high-profile non-bank Infrastructure Leasing and Financial Services, which went into default in late 2018, were AAA-rated and mostly not traded. Regular trading would bring out faults hidden by ratings.

This piece appeared as an editorial opinion in the print edition of The Economic Times.
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via Get on With Corporate Bond Purchases, RBI

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