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Friday, Nov 14, 2008
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Business Daily from THE HINDU group of publications Friday, Nov 14, 2008 ePaper | Mobile/PDA Version | Audio | Blogs |
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Corporate Bonds Money & Banking - Financial Markets Panel calls for repo in corporate bonds
Repo could be extended to LAF or the Liquidity Adjustment Facility Development of hedging instruments like credit default swaps ought to be expedited Our Bureau New Delhi, Nov. 13 Corporate bonds should be made repo-able. This has been recommended by the Expert Panel on Financial Stability Assessment and Stress Testing that has assisted the Committee on Financial Sector assessment set up by the Finance Ministry and the RBI to assess India’s financial stability. If corporate bonds are made repo-able, they will become more liquid, and the secondary market will thus become more active. At present this activity goes on mainly in government securities. Repo is short for a sale and repurchase agreement. It comprises a borrower selling bonds for cash and along with a simultaneous agreement to repurchase those bonds at a fixed later date for more cash than he received. The repo rate is thus the difference between the borrowed and paid back cash but expressed as a percentage. “RBI is committed to permitting market repos in corporate bonds,” former RBI Governor, Dr Y.V. Reddy, had said in a speech in Washington last October. If accepted, the measure will add width to the market. The Government has been laying special emphasis on measures designed to give the moribund corporate debt market a fillip. Eventually, says the panel, facility of repo could be extended to LAF or the Liquidity Adjustment Facility, which was introduced in 2000 to help remove the distortions caused by the old re-finance system. It permits the RBI to set a corridor for short-term interest rates and has become a major instrument in the money market. The panel has also suggested that the development of hedging instruments like credit default swaps ought to be expedited. “While taking into account recent developments in international financial markets, to enhance liquidity in credit default swap markets, shorting within specified limits for banks and primary dealers could be allowed.” Another recommendation is that there should be a gradual reduction in statutory pre-emptions and some rebalancing in favour of corporate bonds. Finally, says the panel, in order to establish a risk-free yield curve for facilitating the pricing of corporate bonds, a parallel development in the government securities market, the term money markets and related derivatives, is also necessary. Bonds: Duration and rate risk Bond returns Oil PSUs get Rs 22,000-cr oil bonds More Stories on : Corporate Bonds | Financial Markets
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