News Bureau

 
 
August 27, 2016

RBI Strengthens Rate Market

According to Soumyajit Niyogi, Associate Director – Credit & Market Research, India Ratings & Research

The Reserve Bank of India’s (RBI’s) measures for the development of the fixed income and currency markets is a step in the right direction and can help broaden the market over the medium- to long-term, says India Ratings & Research (Ind-Ra).

Ind-Ra believes that these initiatives along with the successful implementation of the bankruptcy laws can help broaden the markets, assuming some of the other issues relating to reissuances, stamp duty and asymmetry of information are addressed in the interim. Ind-Ra expects higher rated corporates to directly benefit in the short-term; however the investment guidelines for most investor classes will require changes, to move down the credit curve.

Ind-Ra believes that financial institutions will remain the primary source of funding for corporates, particularly stressed corporates. Ind-Ra estimates that the number of borrowers above the threshold of INR100bn debt obligation aggregates 50 - out of which potentially 24 are either stressed or fairly vulnerable.

RBI’s measures include, allowing lenders to issue masala bonds, to accept corporate bonds under the liquidity adjustment facility, higher ceiling on credit enhancements and providing Foreign Portfolio investors (FPIs) direct access to bond trading platforms.

The increase in the aggregate partial credit enhancement ceiling to 50% from the earlier 20% will help corporates to raise money through bonds. In most developed bond markets, corporate bonds are permitted to be used as collateral for liquidity operations. Allowing corporate bonds as collateral for liquidity operations will improve the demand for corporate bonds, from the perspective of banks subscribing to these bonds.

In a scenario, where AAA papers remain in short supply due to bank investments, it could help in the gradual process of migrating down the rating curve. This is a landmark step for the debt markets and will take India’s corporate bond market regulations closer to the global best practices.

With the change in the issuance guidelines for masala bonds – allowing banks to raise funds overseas as AT1 and T2 capital, India banks can take advantage of the negative sovereign yield (of most sovereigns) and use this opportunity to tap the international markets. Ind-Ra estimates that ‘Banks need to raise INR710bn through AT1 Bond in FY17-18, assuming credit growth of 8%-9%’. Ind-Ra believes that any issuance through this route will vacate space for the borrowings of lower rated banks in the domestic market.

 

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