Repo in corporate bonds to bring liquidity to traders

Though bi-lateral repo in corporate bonds is allowed, volumes are absent because of counter party risks

The Reserve Bank of India (RBI) is planning to introduce a repurchase facility for corporate bonds, which will help the market address liquidity issues. Though bi-lateral repo in corporate bonds is allowed, volumes are low, as counter-party risks and lending rates aren’t system-driven, owing to which these tend to be high.

Last week, RBI Governor Raghuram Rajan had said the central bank was contemplating a repo facility for corporate bonds.

“There is a need for repo in corporate bonds, as it lends liquidity to the market. The trade can meet their short-term fund requirement through this route. It will offer a lot of freedom to institutional investors, as they will have additional comfort to hold these bonds,” said K P Jeewan, head of fixed income, Karvy Stock Broking. Rajan had also emphasised only highly-rated investors should issue papers in the corporate bond market. However, many are wary of investing in corporate bonds, partly because of inadequate information about the companies.

“We do not have a good bankruptcy system that protects the bondholder in times of distress,” Rajan had said.

The government bond market, on the other hand, enjoys good liquidity, as repos are allowed by the central bank. Under this facility, a government security holder can borrow funds from the central bank by selling the security with an agreement to repurchase it at a later date.

“I do not know if this will be implemented soon but if it happens, RBI will provide liquidity to those holding corporate bonds. This will work just like as the repo facility works in government securities. First, the draft norms are awaited. Then, based on feedback, the final guidelines will come and after that, the facility will start for corporate bonds … It will ensure affordable funding for those who hold corporate bonds,” said Ajay Manglunia, senior vice-president (fixed income), Edelweiss Securities.

Of late, the government and RBI have taken a number of steps to boost the corporate bond market. Since the cap for foreign institutional investor (FII) in government securities was nearly breached, FIIs have opted for corporate bonds.