The corporate bond market was in for a boost on Monday as the Reserve Bank of India ( RBI) allowed repo transactions in commercial papers (CPs), certificates of deposits (CDs) and non-convertible debentures (NCDs) maturing in less than one year.
While companies issue CPs, banks issue CDs to raise funds for tenures up to one year.
Market participants can now use these instruments to borrow funds overnight.
Also, RBI has reduced the minimum ‘haircut’ borne on corporate bonds to attract market attention. This means more money would be available against the value of the security.
The haircut for AAA bonds has been brought down from 10% to 7.5%, for AA + rated bonds from 12% to 8.5% and for AA rated bonds from 15% to 10%.
“The move will make non-SLR investments of banks more attractive. In turn, it will increase the demand for corporate bonds as they become more liquid,” said N S Venkatesh, head of treasury, IDBI Bank.
In terms of hedging against corporate bonds, RBI eased some norms on credit default swaps (CDS), too.
It has been more than a year since the central bank put in place the CDS market mechanism. However, after a couple of transactions around launch, there have been no takers for it. Stakeholders had written to the regulator requesting modifications.
On Monday, the central bank allowed CDS on unlisted but rated corporate bonds even for issues other than those of infrastructure companies. It also permitted CDS on CPs, CDs and NCDs.
Participants are divided as ‘Users’ and ‘Market Makers’ in the CDS mechanism. Users have been allowed to unwind their CDS bought position with original seller at a mutually agreeable price. “If no agreement is reached, then unwinding has to be done with the original protection seller at Fixed Income Money Market and Derivatives Association price,” said RBI.
CDS are instruments that transfer the risk of a credit default from a buyer to a seller. The buyer of the swap has to pay a premium to the seller who commits to make good any default by the underlying party.