Now, help corporate bond market along–eCONOMIC tIMES

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It is notable and welcome that corporate bond issues during April-May have more than doubled to Rs. 1.63 lakh crore over the like period last year. It is a major step forward and away from opaque bank lending. However, corporate bonds tend to be privately placed and held to maturity. India needs an active and vibrant corporate bond market to shore up the demand for and supply of long-term, low-cost funds.

The recent Reserve Bank of India (RBI) move to provide a new liquidity window to banks subscribing to corporate paper seems to have helped boost issuance of corporate bonds; also, the average spread between top-rated corporate bonds and government securities has narrowed since March. But the way forward is to design a thriving bond market so that long-term insurance and pension funds, which now have Rs. 55 lakh crore under management, can actively participate. There is much scope to attract foreign portfolio funds too. Rationalisation of stamp duty and transaction taxes is imperative for an active debt market. And back-to-back, we need efficient instruments to hedge currency, interest rate and credit default risks. The recent RBI move to allow banks and primary dealers to participate in the offshore rupee derivatives market is sensible, but more needs to be done. For example, although credit default swaps (CDS) have been introduced in India, there is no activity in the market.

And the reason in the main is that the RBI Act precludes ‘netting’, and banks and primary dealers need to routinely provision much higher capital on a gross basis, even if they are merely acting as market makers and have positive and negative positions against the same counterparty. So, the CDS market remains stillborn. An Integrated Trade Repository for corporate bonds is also conspicuously missing.

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