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RBI eases norms for trading in corporate bond repo market

08 Jan 2013 Evaluate

In a move towards deepening the bond markets, the Reserve Bank of India (RBI) has eased the norms for trading in corporate repo markets thereby allowing short-term debt securities also qualified for it, and by widening the credit default swaps basket. The apex bank said short-term corporate debt could be traded in the repo market, where holders of securities pledge them to borrow funds with a promise to buy them back at a future date.

The central bank notified that repo in corporate debt shall also be permitted on commercial papers, certificates of deposit and non-convertible debentures of less than one year of original maturity. In short-term securities like commercial paper and certificate of deposit, the liquidity is higher, so the price discovery will be better. The Indian bond market has been shallow because of tight regulations. However, for this move to improve trading volumes, SEBI has to permit mutual funds to borrow against their assets to meet at least their temporary payment needs.

The RBI also allowed credit default swaps (CDS), an insurance against default, on unlisted corporate debt securities and those with less than one year maturity. Further RBI said ‘in addition to listed corporate bonds, CDS shall also be permitted on unlisted but rated corporate bonds even for issues other than infrastructure companies and CDS shall also be permitted on securities with original maturity up to one year like commercial papers, certificates of deposit and non-convertible debentures with original maturity less than one year as reference/deliverable obligations’.

Central bank also reduced the minimum discount that lenders have to withhold, while lending against a security. For AAA Securities, it is 7.5% now from 10%, and for AA+ bonds, it is 8.5% from 12%.

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