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In a bid to develop the corporate debt market, the Reserve Bank of India (RBI) has allowed bonds issued by multilateral financial institutions like World Bank Group, the Asian Development Bank and the African Development Bank in India as eligible underlying for repo in corporate debt securities.
Repo is repurchase agreement and it is a short-term borrowing for traders in corporate debt. This will serve as one more instrument for hedging among traders. According to RBI, repos in corporate debt securities shall be for a minimum period of one day and a maximum period of one year.
For arriving at the market value of the corporate debt security, RBI has asked participants undertaking repo in corporate bonds to refer to the credit spreads published by Fixed Income Money Market and Derivatives Association of India (FIMMDA).
RBI said that participants shall enter into repo transactions in corporate debt securities in the over-the-counter (OTC) market. Besides that RBI said the security acquired under repo shall not be sold by the repo buyer (lender of the funds) during the period of repo.
According to the guidelines, the amount borrowed by a bank through repo in corporate debt securities shall be reckoned as part of its demand and time.
