RBI sets cap for banks buying other lenders' infra bonds

The Reserve Bank of India said on Monday that banks will be allowed to buy infrastructure bonds issued by other lenders only up to a maximum value of 2 percent of the purchasing bank's Tier 1 capital.

Prime Minister Narendra Modi has pledged to improve India's creaking infrastructure and is aiming to provide housing for all by 2022.

With USD 2 trillion of investment required, the Reserve Bank of India (RBI) is keen to develop the market for infrastructure bonds, to encourage long-term investors such as pension, insurance and provident funds to buy bonds issued by banks to fund affordable housing.

Acknowledging the need to allow banks who are market makers to cross-hold each other's bonds, the central bank in April eased its ban on such holdings.

On Monday, the RBI specified that no more than 20 percent ‎of infrastructure bond issues could be earmarked for banks, while the rest must be spread across other diverse investor groups.

The RBI also said the investing bank could not hold more than 10 percent of its corporate bond portfolio in long-term infrastructure bonds.