Need enabling framework for ESG bond issuances in India, says RBI

Dimple Bhandia highlighted that the credit derivatives market has been another area that has struggled to take off

A robust and enabling regulatory framework needs to be established to help Indian companies issue environmental, social, and governance (ESG) bonds within the domestic market, Reserve Bank of India’s chief general manager Dimple Bhandia said on Friday.

She also highlighted the strong response from foreign portfolio investors to the voluntary retention route (VRR) facility, noting that 99 per cent of the funds under this scheme are invested in corporate bonds.

“We find a lot of our companies are going overseas and issuing ESG bonds. This is an area where we need to make an enabling framework for the companies to be able to issue it here,” Bhandia said.

“There has to be significant interest in another route we put in place in 2019, which is called the voluntary retention route, under which foreign investors can bring in money. They can bring in money both into corporate bonds and government securities. Ninety-nine per cent of the money brought into this route is in corporate bonds. So, this has really taken off, and we are happy. We were forced to increase the limit on two occasions because of its popularity,” she added.

Bhandia said the corporate bond market required the development of complementary markets, asserting that one of the key factors supporting liquidity in the government bond market was the presence of a highly active repo market.

“Corporate bond market requires the development of the complementary markets. When you look at the government bond market, one of the major factors that support liquidating the government securities market is an active repo market,” she said.

Bhandia also highlighted that the credit derivatives market had been struggling to take off. The regulations for credit derivatives were first issued in 2011 but progress stalled after just one initial stage.

Following feedback that the regulations were too restrictive, particularly since banks are more natural buyers of protection rather than sellers due to the risks they already carry, the regulations were revised and reissued in 2012. However, since then, only a single trade has occurred, reflecting a lack of momentum.