The Reserve Bank of India today announced a package of measures for the development of fixed income and currency markets. These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication.

Accepting many of the recommendations of the Khan Committee to develop the corporate bond market, it has been decided to enhance the aggregate limit of partial credit enhancement (PCE) provided by banks, permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism. It has also been decided to seek suitable legal amendments to enable the Reserve Bank to accept corporate bonds under Liquidity adjustment Facility (LAF).

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.

A market making scheme in Government securities by Primary Dealers has been worked out in consultation with the Government which may help in increasing the liquidity of semi-liquid securities. Relaxation of tenor and counterparty restrictions in repo market in G-sec will also help in market liquidity.

Foreign Portfolio Investors (FPIs) will be given direct access to NDS-OM to ease the process of investment in debt securities. It has also been agreed with SEBI to provide FPIs facility to trade directly in corporate bonds.

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 rationalised. 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-signalled liberalisation of markets while minimising the risks associated with speculation, competition, and innovation.

Alpana Killawala
Principal Adviser

Press Release : 2016-2017/498

Measures for Development of Financial Markets

I. Market Development

(i) Partial Credit Enhancement – aggregate ceiling to be raised to 50% with sub-limits for individual exposures

With a view to further develop the corporate bond market in India, banks were permitted to provide Partial Credit Enhancement (PCE) to corporate bonds through guidelines dated September 24, 2015. Based on the experience gained by banks in this regard, as also to provide a further impetus to the corporate bond market, it has been decided that the aggregate PCE that may be provided by the financial system for a given bond issue will be increased from the present level of 20% to 50% of the bond issue size subject to the PCE provided by any single bank not exceeding 20% of the bond issue size and the extant exposure limits. The necessary guidelines will be issued shortly.

(ii) Issuance of rupee denominated bonds overseas (Masala Bonds) by banks as AT1 and T2 capital and under the framework of incentivising issuance of long term bonds by banks for financing infrastructure and affordable housing

A framework for issuance of rupee denominated bonds overseas, also called Masala Bonds, was put in place in September 2015. With a view to develop the market for rupee denominated bonds overseas, as also to provide an additional avenue for banks to raise Additional Tier I capital and Tier II capital, it is proposed, in consultation with the Government, to permit banks to issue Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, by way of rupee denominated bonds overseas. It is also proposed to allow banks to issue rupee denominated bonds overseas under the extant framework of incentivising issuance of long term bonds by banks for financing infrastructure and affordable housing.

(iii) Easing access to the forex market for hedging in the OTC and Exchange traded currency derivatives

1. Over the years, Reserve Bank has been facilitating participation of both residents and non-residents in the foreign exchange market to meet their transaction and hedging requirements. In order to further ease participation and also align regulations, 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 USD 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. Authorised dealer banks will monitor adherence to this limit on the basis of periodic reporting by the exposed persons.

2. In addition to the above limit for exposed persons, AD banks may, based on their assessment of the risk management capabilities of customer, allow an open position limit of upto USD 5 million. This measure is intended to improve liquidity and depth in the foreign exchange market, and the limit will be revised from time to time based on experience.

The detailed procedures for (a) and (b) will be worked out after wider consultation with stakeholders and the guidelines issued by November 2016.

(iv) Working Group to review the guidelines for hedging of commodity price risk by residents in the overseas markets

Exposure of Indian entities to commodity price risks has been accentuated by the growing integration of the Indian economy with the rest of the world and increasing volumes of cross border trade. It is proposed to review the existing framework for hedging of commodity price risk in the overseas markets with the objective of addressing the commodity price risk management of Indian companies during the development phase of domestic commodity derivative markets. The review is proposed to be carried out by a group with members drawn from RBI and SEBI and a few external experts.

(v) Large Exposure Framework and Framework for enhancing Credit Supply for Large Borrowers through Market Mechanism

1. Large Exposure Framework - With a view to align the exposure norms for Indian banks with the BCBS ‘Standards’ for measuring and controlling Large Exposures, the Reserve Bank had issued, in March 2015, a Discussion Paper on the Large exposures Framework and Enhancing Credit Supply through Market Mechanism, for comments from the stakeholders. The comments and feedback received on the proposals relating to the Large Exposures Framework have been examined and the draft guidelines on the Large Exposures (LE) Framework will be issued today. The LE framework will be implemented in full by March 31, 2019.

2. Enhancing Credit Supply for Large Borrowers through Market Mechanism - Absence of an overarching ceiling on total borrowing by a corporate entity from the banking system has resulted in banks collectively having very high exposures to some of the large corporates in India. To address the resulting systemic concerns, a Discussion Paper on proposals to promote credit supply through market mechanism was published by RBI in May 2016. Based on the comments and feedback received from the stakeholders, the necessary guidelines on the ‘Framework for enhancing credit supply through Market Mechanism’ will be issued today.

II. Enhancing Participation

(vi) Permitting brokers in repo in corporate bonds

Currently, participation in corporate bond repos is restricted to regulated entities like banks, primary dealers (PDs), mutual funds, insurance companies etc. In order to encourage activity in the corporate bond market, brokers authorized as market makers will be allowed to participate in the corporate bond repo market. This measure is expected to meet their funding and securities requirement arising out of market making activities. The enabling circular in this regard would be issued today.

(vii) Allowing FPIs to trade on NDS-OM

As announced in the first Bi-Monthly Monetary Policy Statement 2016-17, necessary modalities have been finalised to enable FPIs to trade on NDS-OM through primary members. Guidelines in this regard shall be issued shortly.

(viii) Allowing FPIs to trade directly in corporate bonds

To facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognised stock exchange, it has been decided, in consultation with SEBI, to allow FPIs to transact in corporate bonds directly without involving brokers. Necessary changes to FEMA regulations shall be made shortly.

(ix) Encouraging further retail participation in Government securities

As announced in the First Bi-monthly Monetary Policy Statement, 2015-16, individual investors having demat accounts with depositories have been allowed to trade directly on NDS-OM with effect from 16th August 2016. As a next step, RBI will remove the remaining restrictions on seamless transfer of Government securities between depositories and RBI. This should promote retail participation in the market by facilitating participation by small investors in primary as well as secondary markets.

III. Facilitating Greater Market Liquidity

(x) Market Making in Government Securities

With an aim to augment liquidity in the government securities market, a market making scheme by Primary Dealers has been devised in consultation with the Government of India. To begin with, the PDs will be offering firm two way quotes on the NDS-OM and the OTC platforms in designated semi-liquid securities. In order to enable the PDs to maintain inventory in the identified securities, a combination of re-issuances and switches have been planned. The scheme is proposed to be launched by end-September, 2016.

(xi) Accepting corporate bonds under Liquidity Adjustment Facility (LAF) of RBI

To promote development of the corporate bond market, following emerging international practice, RBI is actively considering corporate bonds as eligible collateral for liquidity operations. The process to make necessary amendments to the RBI Act has commenced.

(xii) Removing the 7-day restriction for lending by listed companies in market repo in Government securities (G-Sec)

Currently, listed companies can lend through repos in G-sec for a minimum tenor of seven days to banks and PDs, which constrains their participation. It is proposed to allow such companies to lend through the repo market, without any tenor or counterparty restrictions. Guidelines based on a comprehensive review of regulations on market repo in G-sec are being issued today.

(xiii) Introduction of Electronic Dealing Platform for repo in corporate bonds

It was announced in the Fourth Bi-monthly Monetary Policy Statement, 2015-16 dated September 29, 2015 that in order to further develop the repo market, a broad framework for introduction of electronic dealing platforms for repo in corporate bonds will be designed in consultation with the Securities and Exchange Board of India (SEBI). Corporate Bond and Securitisation Advisory Committee (CoBoSAC) of SEBI had constituted a sub-group with representation form all the stakeholders to come out with the modalities for introduction of such platforms. The sub-Group has recently submitted its recommendations. RBI will issue the necessary guidelines in consultation with all the stakeholders by end October, 2016.

IV. Improving Communication

(xiv) Broadcasting of Auction Results and Allotment at fixed time

As part of the market borrowing programme of the Government of India (GoI) and State Governments, RBI conducts the primary market auction of GoI dated securities, Treasury Bills and State Development loans. The auction results are thereafter put out in public domain. In order to provide greater predictability to the timing of declaration of auction results, it has been decided that auction results will be published by RBI at a stipulated time. This will be introduced for the GoI dated securities and T-Bills segments, to begin with. A circular to this effect is being issued.