RBI opens bond market, allows banks to issue `masala bonds'

The Reserve Bank of India (RBI) on Thursday announced a package of measures to enhance participation, facilitate greater market liquidity and improve market communication in order to develop the market for fixed income bonds and currencies.

The decision, which is in line with the recommendations of the Khan Committee to develop the corporate bond market, enhances the aggregate limit of partial credit enhancement (PCE) provided by banks, permits brokers in corporate bond repos, authorises the platform for repo in corporate bonds and encourages 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.

Currently, masala bonds can be issued only by corporates and non-banking lenders like HFCs and large NBFCs. Masala bonds are instruments through which Indian entities can raise funds by accessing overseas capital markets, while the bond investors hold the currency risk.

These will constitute additional tier-I and tier-II capital for the lenders, it said, adding such overseas bonds can also be issued to finance infrastructure and affordable housing under a current dispensation, which applies for foreign currency bond raising.

RBI said it has, in consultation with the government, worked out a market making scheme in government securities by primary dealers, which would 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, an RBI release stated.

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.

These measures are intended to liberalise markets while minimising the risks associated with speculation, competition, and innovation, RBI added.

Final guidelines on the currency markets will be issued later, in November, while some measures come into effect immediately. This is so as the move to open the currency market is sure to bring in an element of speculation in the exchange rate.

''The Reserve Bank will now permit entities exposed to exchange rate risk, whether resident or non-resident, to undertake hedge transactions with simplified procedures, up to a limit of $30 million at any given time. The exposed person will be free to access any market (over the counter or exchange) and use any of the permissible products,'' the RBI said in its statement on its website.

In addition, banks might, based on their assessment of the risk management capabilities of a customer, ''allow an open position limit of up to $5 million,'' the RBI said.

The guidelines on currency market move was intended to improve liquidity and depth, the RBI said, adding the limit would be revised according to experience.

In a role reversal, companies will now be allowed to lend money to banks through a market repo mechanism. So far, listed companies could only lend a maximum of seven-day money, taking government securities as mortgage, also known as repo. The RBI said this ''constrains their participation''.

''It is proposed to allow such companies to lend through the repo market, without any tenor or counterparty restrictions. Guidelines based on a comprehensive review of regulations on market repo in G-Secs are being issued today,'' it added.