Welcome measures for the bond market

Welcome measures for the bond market

The Reserve Bank of India has announced welcome measures to boost the corporate bond market along with those for currency derivatives and interest rate futures. We do need to proactively develop domestic financial markets to better integrate with global markets and reduce the cost of capital, raise investment levels and also improve diversification of attendant risks. The ongoing moves to have an active corporate bond market requires reform of the currency and interest rate derivative markets. Financial markets are all related. The RBI has rightly removed the stipulation that foreign portfolio investors (FPI) limit exposure to no more than 20% of their corporate bond portfolio to a single corporate entity. It makes perfect sense to deepen access to FPIs in the bond market.

The move to do away with segmented facilities for residents and non-residents when it comes to hedging foreign exchange risk, and to plan a “single unified facility for all users” is sensible. It would gainfully liberalise the market for such products. But to mandate that participants in the forex derivatives market also have “valid underlying exposure” would surely be much too restrictive; there should be no outright ban on market participation. A task force to think through offshore rupee markets is timely. For a large globalising economy like India’s, we do need to improve residents’ access to derivatives markets abroad.

Further, the move to rationalise interest rate derivatives for consistency and ease of access is also significant. The ground reality is that there is very limited recourse to interest rate derivatives in the Indian financial sector. It needs to be proactively changed to better manage risks. The RBI needs to do more to have a thriving corporate bond market.