RBI allows banks to raise Masala bonds, opens up currency market

The central bank authorizes [null,2,0]  the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism The Reserve bank of India (RBI) on Thursday allowed banks to elevate capital via Masala bonds in the overseas market, and said it would seek legal amendments to allow banks borrow from the central bank pledging corporate bonds, or corporate bond repo.
A man walks past the RBI headquarters in Mumbai. Photo: Kamlesh Pednekar

The central bank allowed resident individuals to maintain greater open positions in the currency market and lifted some restrictions on hedging in the currency market, essentially opening up India’s closely guarded currency market, and perhaps bringing and element of speculation in the change rate.

“Reserve bank will now permit entities exposed to exchange rate risk, whether resident or non-resident, to undertake hedge transactions with simplified procedures, upto a limit of $30 million at any given time. The exposed person will be free to access any market (OTC or exchange) and use any of the permissible products at his discretion,” RBI said in its statement on its website.

The measures taken on Thursday are for the development of fixed income and currency markets — one of the unfinished agenda of outgoing RBI governor Raghuram Rajan [null,0,3,0,3].

The measures also include inducing liquidity in semi-liquid government securities, apart from initiates to make corporate bond market more vibrant. Many of the measures that the significant financial institution announced have been built at the recommendations of the H R Khan committee report on corporate bond market that was released a week ago by Securities exchange Board of India (SEBI).

“These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication,” the central bank said in a statement on its website.

In the comprehensive measures announced on Thursday, the central bank decided to enhance the aggregate limit of partial credit enhancement provided through banks to corporate bonds, permit brokers in corporate bond repos, authorize the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism.

“To further encourage the overseas Rupee bond market, banks are being permitted to issue Rupee bonds overseas (Masala Bonds) for their capital requirements and for financing infrastructure and affordable housing,” the central bank said.

The central bank said it has worked out a market making scheme in government securities by Primary Dealers (underwriters of government bonds) in consultation with the government which may help in “increasing the liquidity of semi-liquid securities.”

RBI will relax the tenor and counterpart restrictions in repo market in G-sec, and will give foreign portfolio investors (FPIs) direct access to RBI’s anonymous bond trading platform NDS-OM to ease the process of investment in debt securities. SEBI and RBI both have agreed to extend the equal facility to FPIs for corporate bond, the statement said.

“In a fundamental shift in foreign exchange market regulations, greater leeway is being proposed for residents to maintain open positions. The permissible limits for hedging in the OTC as well as exchange traded markets are also being rationalized,” RBI said.

Besides, the central bank added, “it is also proposed to comprehensively review the framework for hedging of commodity price risk in the overseas markets by Indian companies”.

“The above measures underline the broad philosophy of measured and well signaled liberalization of markets while minimizing the risks associated with speculation, competition, and innovation,” RBI further said.