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Q. Corporate bond market reforms: Comment on recently announced reforms in the corporate bond market.
Aug 29, 2016 Related to : GS Paper-3

Ans :

Introduction-

A corporate bond is issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, to expand business etc. The term is usually applied to longer-term debt instruments, with maturity of at least one year. Recently Reserve Bank of India has announced reforms in corporate bond markets. Newly announced reforms are aimed at adding more depths and vibrancy to the bond market.

Key features of reforms-

  • Now RBI allowed market making in Government Securities (G-Secs), accepted corporate bonds as eligible collateral under its Liquidity Adjustment Facility.
  • It has removed the 7-day restriction for lending by listed companies in G-Sec market repo.
  • RBI has introduced the electronic platform for corporate bond repos.
  • Now RBI has allowed direct access to Foreign Portfolio Investors (FPIs) to the corporate bond market sans brokers.
  • Other reforms include the staggered reduction of banks' loan exposure, increase participation by overseas investors in corporate bonds, and make top rated bonds eligible for borrowing from RBI for liquidity needs etc.

Analysis-

  • These reforms announced by RBI were long overdue, and these are sensible and forward-looking reforms in the corporate bond market.
  • These reforms could propel the Indian corporate bond market to global standards and eliminate the risks of large non-tradable exposure to a particular group.
  • The measures will help markets attain more maturity. The dependence on bank credit will now come down significantly with lower-rated corporates getting access to corporate bond market.
  • These measures play important role in further market development, and it will enhance participation, and facilitates greater market liquidity.

Suggestions-

  • RBI needs to boost the corporate bond market as a whole, and not be finicky and remain confined to the top-end, AA and above rated bonds.
  • Similarly there is need to boost futures in corporate bonds, which would require liberalisation of both currency futures and other derivative instruments in equities and commodities.
  • Also RBI should establish the functional market for credit default swaps, to manage risks of default on bonds.

Conclusion-

The recent measures announced by RBI will helps in the development of corporate bond market in the country. These are more sensible and forward looking and long awaited measures. In this backdrop recent step by RBI in the corporate bond market is welcome move.


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