In a bid to infuse more liquidity in the fledgling corporate bond market, Union Finance Minister Nirmala Sitharaman announced creation of a permanent institutional framework, but finer details will tell if this could be a success, say bond market participants.
"To instill confidence among the participants in the corporate bond market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework. The proposed body would purchase investment grade debt securities both in stressed and normal times and help in the development of the bond market,” Sitharaman said in her speech.
There weren't too many details about the framework, but this is not the first time the government has talked about this issue, though little has happened in this space thus far. Foreign portfolio investors (FPI) have used up just 25 per cent of their Rs 5.42 trillion limit in the space.
“It has to stem from creating a new class - preferably retail - as a viable investor class giving tax breaks. That’s what we have seen in other markets, otherwise this framework is unlikely to take off. Also, the corporate bonds should be eligible for repo,” said the head of treasury at a bank.
Bond dealers also pointed out that the secondary market volume in the corporate bond market won’t deepen if the yields are not high and commensurate with the risk. The yields on better rated firms only offer marginally better interest rate than equivalent maturity government bonds. The deposit rates of banks are also higher than the corporate bond yields, which may act as a deterrent in attracting the retail investors.
Tax free bonds can attract some retail investors, but that is unlikely to be the case.
“The proposed institutional framework for corporate bonds is a concrete step taken in this budget. In times of stress, if there is a permanent institutional framework to buy bonds and infuse liquidity in the market, it may take away a lot of uncertainty and stress from the markets. However, finer details remain to be seen about mechanisms for the same," said Pankaj Agrawal, Director, AK Capital.
Furthermore, “tax efficient zero-coupon bonds by notified Infrastructure Debt Funds may be further useful for funding of infrastructure. Market will certainly looking forward for details of the same,” Agrawal said.
“It is good if someone buys the bonds, but will they buy the stressed bonds? At what rate? And what rate those bonds will be sold in the secondary market and to whom?” said another treasury head requesting anonymity.