Banks might be allowed to buy infrastructure bonds

The central bank had last year asked lenders to only issue debt

The Reserve Bank of India (RBI) is considering allowing banks to buy infrastructure bonds, in a bid to jumpstart a market that has suffered from low trading volumes after launching last year, said a source with knowledge of the central bank's plan.

This move would mark a reversal for the RBI, which last year allowed lenders to only issue debt, while limiting purchases to investors such as pension funds, provident funds, and insurers.

That limitation had backfired, according to bankers, severely crimping trading volumes in the market since lenders are the biggest buyers and traders in debt markets. Reviving investment in infrastructure is a priority for Prime Minister Narendra Modi, who has been looking to ease regulations and bottlenecks to spur the sluggish economy.

“We are quite flexible on the suggestions of allowing banks to initially develop this market by buying a certain percentage of the (infrastructure) bonds,” said a top policymaker. However, the policymaker cautioned  RBI could impose limits, including on how much debt lenders can purchase, or allowing them to hold bonds for only a short period of and then making it mandatory to sell these to long-term investors.

That could soothe RBI's concern that risks are being excessively concentrated in debt markets, given banks are often the biggest issuers but also the biggest buyers, meaning lenders end by purchasing each other's bonds.

Infrastructure bonds were launched by RBI last year in a bid to help the government fulfill its plan to provide affordable housing to all by 2022, a goal that needs about $2 trillion of investment.
 

Banks issue the debt and use the proceeds to fund infrastructure projects.

"Allowing banks to invest in infrastructure bonds would help improve primary and secondary market liquidity," said Shashikant Rathi, senior vice-president and head of investments, capital markets and asset liability management at Axis Bank.

Since their launch in August, only around Rs 15,000 crore ($2.42 billion) of infrastructure bonds have been issued, well below the Rs 50,000 crore worth of debt that traders had estimated could have been raised within the first year.

Under Governor Raghuram Rajan, the RBI has been keen to develop debt markets to increase investor interest. The central bank successfully launched bond futures last year, after two previous attempts at launching bond futures in 2003 and 2009 failed because of what traders said were poor designs.