RBI announces measures for fixed income, currency markets

The Reserve Bank of India today announced a package of measures for the development of fixed income and currency markets. These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication. Accepting many of the recommendations of the Khan Committee to develop the corporate bond market, it has been decided to enhance the aggregate limit of partial credit enhancement (PCE) provided by banks, permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism. It has also been decided to seek suitable legal amendments to enable the Reserve Bank to accept corporate bonds under Liquidity adjustment Facility (LAF). To further encourage the overseas Rupee bond market, banks are being permitted to issue Rupee bonds overseas (Masala Bonds) for their capital requirements and for financing infrastructure and affordable housing. A market making scheme in Government securities by Primary Dealers has been worked out in consultation with the Government which may help in increasing the liquidity of semi-liquid securities. Relaxation of tenor and counterparty restrictions in repo market in G-sec will also help in market liquidity. Foreign Portfolio Investors (FPIs) will be given direct access to NDS-OM to ease the process of investment in debt securities. It has also been agreed with SEBI to provide FPIs facility to trade directly in corporate bonds. In a fundamental shift in foreign exchange market regulations, greater leeway is being proposed for residents to maintain open positions. The permissible limits for hedging in the OTC as well as exchange traded markets are also being rationalised. It is also proposed to comprehensively review the framework for hedging of commodity price risk in the overseas markets by Indian companies. Taking about the news, Manoj Rane, of BNP Paribas India, said that corporate bond repos haven't taken off. Broker participation might help a bit, he said.Ashutosh Khajuria, ED, Federal Bank, said that brokers may not be the market makers here. "They would be the match maker not market makers. Market makers will be borrowers and lenders." He also said that FPIs being permitted in repos corp market and Gsecs is a welcome move.

Jayesh Mehta of Bank of America said that the measures are an improvement. Frankly, there are a lot of challenges," he said. Below is the verbatim transcript of Manoj Rane, Ashutosh Khajuria, Jayesh Mehta's interview to Latha Venkatesh on CNBC-TV18.Q: From the little I read, do you think that this is going to make a seminal difference?Rane: I don’t think it is going to be making a much of a difference. I think what the market was really looking forward to was for corporate bond to be permitted under liquidity adjustment facility (LAF), having said that, the report itself the corporate bond market report under Securities and Exchange Board of India (SEBI) aegis was actually fairly clear that they were waiting for the secondary market in Repos to improve, prior to allowing it for LAF, but the market was really expecting in the backdrop of FCNR redemption and provision of additional liquidity, issues relating to liquidity coverage ratio etc, it would certainly help banks, but having said that not too much in terms of what you have told us so far.Q: Permitting brokers in the Repo in corporate bonds, at the moment participation in Repo is restricted only to regulated entities like banks and primarily dealers mutual fund, insurance companies, now they are going to allow I guess corporate bond brokers that is money market brokers as market makers, will that make a difference and they are expecting to meet their funding requirements as well arising out of this market making activities, they will issue an enabling circular today will that help?Rane: We need to see exactly what this means, because if it means that they want to allow brokers to act as a kind of liquidity providers in the corporate bond market and hence participate in the Repo, if that is the point or is the point really is that Repos earlier were to be done directly between counterparties and now brokers can facilitated the same.Q: It looks like brokers can facilitate, in fact, if they have to be market makers then it is little more than just facilitation isn’t it?Rane: That’s right. To that extent it is merely for brokers to act as brokers which I presume that’s the idea, because for them to push brokers towards actually starting to market make and allow them to participate in Repos, I think that might be a little extended. I didn’t even see that as the part of the committee’s recommendation, but the point is that corporate bond Repos haven’t really taken off.Q: How does it look, is this a comprehensive improvement of access and liquidity?Mehta: No, it’s definitely some improvement to access a liquidity, but frankly looks like little bit lot of challenges there, so to put some of the things of course fixed time announcement of auction results will be cherished by all bond traders. Certainly, if they can have their lunch in peace so that’s the first positive news of it.I think even the tier 1 and tier 2 capital bonds by banks that is also pretty good. Only thing is one has to see the pricing perhaps the international pricing versus the local borrowing pricing.Q: Which one?Mehta: The tier 1 for the banks, so one will have to see because there are senior secured bonds of Indian banks abroad that pricing versus AT1 pricing and AT1 pricing onshore. I think that pricing is going to be a very crucial part of that.Q: At the moment banks don’t issue these bonds abroad at all isn’t it, they only issue green bonds?Mehta: No, they issue their offshore branches. So they issue this as ultimately the same credit risk and they issue it from their offshore branches, that is then their senior bonds and they are also trading at attractive yields.One needs to see the attractive pricing what they are getting today from the domestic market and what the investor expectation for this pricing offshore would be.Q: But since this is a new category will it be little lower yield, if the same bank borrowed from the global markets?Mehta: Because global guys would compare the equivalent dollar bond which is senior and that is right now, intuitively if I look at the hedge price into rupee intuitively trading more or less just little under where they are able to raise tier 1 bond in India.Q: The big thing is foreign portfolio investors (FPIs) will be allowed trade in Negotiated Dealing System-order matching (NDS-OM) as well FPIs will be allowed to trade directly in corporate bonds in the OTC segment offered by stock exchanges, your thoughts?Khajuria: On the broker part I think that brokers may not be the market makers here, the way they were intermediating for the spot deals earlier before the advent of NDS-OM, the electronic broker rather if I can use that word for that platform, I think they would be the matchmakers not the market makers.Market makers ultimately have to be the borrowers and the lenders. As regards to FPIs participating in NDS-OM, that is a welcome move because gradually their share in investment in Indian debt is increasing and with opportunities being there and more stability in the currency market, particularly the rupee being stable there could be more attraction of FPIs coming here. I think their participation would certainly increase the liquidity in the market.Q: Individual investors having demat accounts with depositories have been allowed to trade directly on the NDS-OM starting August 16, has that helped?Khajuria: It would take time because despite several measures being taken by RBI, various banks to bring retail investors to G-Sec market, it has not succeeded to the extent it was expected. On one hand you have no credit risk there, people are comfortable with taking higher credit risk in the form of investment in equity but somehow G-Sec market couldn’t attract them. May be it is just another attempt to do that.I wouldn’t comment anything on that, let us see how it progresses but it is one more move towards that.Q: For retail participation they are going to make it seamless - if you have a demat account and a depository you can seamlessly buy and sell G-Secs, so you get an entry into the NDS-OM, do you think at least some HNIs will be interested?Khajuria: I think that is one segment which can get attracted because whatever said and done on NDS-OM platform you have the highest liquidity. On exchange platform you do not have liquidity as far as G-Secs are concerned. Earlier also two depositories NSDL and CDSL both were having their SGL accounts with RBI ad through that retail participation or retail investment was possible through exchanges but somehow it did not attract the investors on the exchange platform.Now with NDS-OM you have higher liquidity and you have a separate platform there and CCIL also is taking a lot of initiatives to educate the retail investors and prompting all the participants to at their level mobilise the retail investors, so there could be some improvement. So, let us see what comes as a result of this measure.