Interest rate futures in corp bond market soon

Outline to become clear soon; stock exchange platform to be used.

The government is set to pave the way for introduction of interest rate futures in the corporate bond market. This is to support the initiatives proposed in the budget for boosting corporate fund raising for the infrastructure sector through this route.

A senior finance ministry official told Business Standard consultations were on with associated institutions. The target was to bring in the required framework for deepening the corporate bond market in the next two months.

The introduction of interest rate futures in the corporate bond market will make returns and hedging attractive. It is expected to enhance participation in this segment in a major way. Lack of broad-based participation has been a major bottleneck in the development of a corporate bond market in the country.

Other steps, too
The official said the whole plan was expected to take clear shape within a few days, adding that interest rate futures will utilise the stock exchanges’ platform. He indicated the ministry was contemplating other steps to support the budget announcements for strengthening the corporate bond market.

To enhance the flow of funds to the infra sector, finance minister Pranab Mukherjee has proposed to raise the investment limit for foreign institutional investors (FIIs) in corporate bonds with residual maturity of over five years issued by companies in the infrastructure sector, to $25 billion (Rs 1.13 lakh crore).

He said in his budget speech, “This will raise the total limit available to the FIIs for investment in corporate bonds to $40 billion. Since most of the infrastructure companies are organised in the form of Special Purpose Vehicles, FIIs would also be permitted to invest in unlisted bonds with a minimum lock-in period of three years. However, the FIIs will be allowed to trade amongst themselves during the lock-in period.”

Finance ministry officials said guidelines were being formulated to implement the budget announcements. Combined with the steps like interest rate futures, the whole policy atmosphere was likely to give a big push to the corporate bond market.

The Economic Survey for 2010-11 has also stressed on the need for deepening the domestic capital markets and the role of non-bank institutions, especially in the corporate bond and debt markets.

The Survey has said, “With bank finance drying up for long-term infrastructure projects in view of the asset-liability problems faced by the banking system, the need for further development of a deep and vibrant corporate bond market can hardly be overemphasised.”

Pointing out that the government securities market had evolved over the years and expanded with the increasing borrowing requirements, the Survey said in contrast, the corporate bond market had languished in terms of both market participation and structure.

“The corporate bond market, as a result, is only about 14 per cent of the total bond market and market liquidity and infrastructure remain constrained,” said the Survey.