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Insurance regulator, Irdai, has given its go-ahead for insurers to invest in debt securities issued by infrastructure investment trusts (InvITs) and real estate investment trusts (Reits). The measure is intended to build a vibrant market for corporate debt in India. But taking the horse to the water is one thing and making it drink something else. To make pension and insurance monies flow to corporate bonds, these bonds have to be made attractive and the market completed for hedging risks of interest and exchange rate changes and credit default. A helpful first step would be getting the Credit Guarantee Enhancement Corporation of India, announced in Budget 2019, up and running.
Norms for long-term investors like insurance companies and pension funds require them to invest in debt securities rated AA or higher. But ongoing infrastructure projects are rarely rated above BBB, given a panoply of construction and other risks. Hence the pressing need for institutional mechanism and oversight to address default risks on bond payments, with tools such as excess interest spread, cash collateral and partial credit guarantees. Assets under management by pension and insurance funds now exceed Rs 55 lakh crore. Enhanced policy coordination is needed for long-term investors to step up resource allocation for infrastructural investments. In tandem, investors also need risk mitigation products to manage routine currency, interest rate and credit risks. And here, it is very much a work in progress. Take, for instance, credit risks. The law has recently been changed to allow ‘netting’ of exposure on derivative instruments, but the norms for credit default swaps have yet to be put in place. Or consider interest rate derivatives. Sure, non-residents can now hedge and trade in the rupee interest rate derivatives market, but there remain restrictions galore both for retail and other participants.
There are other rigidities as well. The glitches surely need prompt removal for a vibrant market for corporate bonds fund infrastructure.
This piece appeared as an editorial opinion in the print edition of The Economic Times.