The Hindu Business Line : PSU bond issues may get repo status

Bangalore, Oct.13 Bond issues of public sector undertakings (PSU) are likely to become eligible for repurchase operations (repo) to ease the current tight liquidity situation. Many of the banks have already pushed for the inclusion of ‘Triple A’ rated PSU bonds for repurchase operations. High-level banking sources said that the RBI was amenable to the suggestion.

Repos are liquidity injection operations, whereby the RBI advances liquidity against collateral of eligible securities. Currently, only sovereign borrowings and State development loans are eligible for the repurchase operations through the Liquidity Adjustment Facility (LAF) window of the RBI.

Even special Government securities, bonds issued to refineries, fertiliser companies, Food Corporation of India, SBI and UTI are not eligible securities for the repos despite their sovereign issue status. Outstanding special Government securities are currently in excess of Rs 1 lakh crore. Currently, PSU bonds are eligible securities only for collateralised lending and obligations (CBLO) transactions.

The sources said that the PSU bonds are likely to be included as eligible category of securities for repurchases when the RBI announces its peak season Credit Policy in two weeks’ time. They said that the move would also provide greater depth to the bond markets.

Besides, the sources said the measures were considered in view of the shortage of repoable securities with the banks.

Infrastructure lending

The sources said that inclusion of PSU bonds was in view of the large volumes of floating stock. Inclusion of PSU bonds was also to satiate liquidity requirements for lending to the infrastructure sector. Infrastructure, despite the liberalisation of the external commercial borrowing guidelines, faces intense difficulties in raising cross border resources. Among the PSUs likely to benefit from the move include institutions such as the Indian Railway Finance Corporation, Power Finance Corporation and Rural Electrification Corporation, all of whom are specialist financiers to the infrastructure sector.

Higher discounting

Bankers said including PSU bonds in the RBI’s repos would improve the pricing regime. But the sources said that any repos in PSU bonds are likely to be done at substantially higher discounting, or well above the current RBI’s repo rate of 9 per cent.

At present, bankers said that there were not very many takers for PSU bonds in the CBLO markets. This was in view of the risk weighting requirements. Given the current turmoil in the financial markets, most banks are keen to defend their capital to risk weighted asset ratios. Besides, PSU bonds are still seen as illiquid instruments, especially in the current market conditions.

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