The parting gift that Raghuram Rajan gave to India’s corporate bond market is a memorable one

The Reserve Bank of India has announced a fleet of changes that would widen India's corporate bond market so that it can match their global counterparts while also eliminating the risk of banks' large non-tradable exposures to a particular group.

Investors are, obviously, happy with the decision, and can’t thank RBI governor Raghuram Rajan enough, who has given them this gift just a few days before he steps down from his post. The changes include the staggered reduction of loan exposure that banks have, increased participation allowed that overseas investors are allowed to make in corporate bonds, and making top-rated bonds eligible for loans from RBI for their liquidity needs.

Other than this, banks can also take overseas rupee-denominated long-term masala bonds to shore up their falling capital and financing infrastructure and affordable housing. Brokers are now allowed to participate in the corporate bond repo market so that the market has a wide reach.

"The measures will help markets attain more maturity," Shashikant Rathi, head of treasury at Axis Bank, told ET. "The dependence on bank credit will now come down significantly with lower-rated corporates getting access to the corporate bond market. The long wait for a deepened corporate bond market may come to an end."

RBI has also raised the partial credit enhancement limit from 20% of the bond issue size to 50%, given that no single bank exceeds a fifth of the total and the extant exposure limits.

"The increase in ceiling for partial credit enhancement will improve credit ratings for bond issuers," said Jayesh Mehta, country treasurer at Bank of America Merrill Lynch. "The corporate bond market will see more issuers coming in as borrowers are now mandated to tap the market meeting credit need beyond a stipulated limit." The steps are in line with the HR Khan committee's recommendations. "These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication," RBI said on Thursday.

DIRECT ACCESS FOR FPIS
RBI proposed that foreign portfolio investors (FPIs) be allowed to access the market without brokers, and market regulator Securities & Exchange Board of India has given its approval.

Also, to align bank exposure norms to global standards and reduce risk of business concentration, RBI has proposed to put a limit on banks' large exposure limit to 20% and 25% of tier-I capital in respect of each counter party and group of connected counterparties. Earlier, these limits were capped at 15% and 40% of capital funds, respectively.

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