RBI’s monetary policy committee (MPC) reducing for the second successive time its benchmark policy rate to 6% is welcome.
This signals lower cost of funds going forward, on weaker growth. And, yet, despite the latest 0.25% slash, real interest rates remain relatively high, as headline inflation measured by the consumer price index (CPI) is muted at under 3%.
RBI’s latest move seeks to follow through with sound mechanism design and better scope for price discovery, plus trading in GoI securities, so as to fine-tune determining the overall cost of funds. A task force is to be set up to design a secondary market for corporate loans. A secondary bond market is also needed. RBI must stay focused to put this in place so as to provide transparency in bank lending as well as to avoid stressed bank assets
The policy statement also mentions that RBI will be proactive in shoring up liquidity in the banking system by rationalising the banks’ mandatory holding requirements of GoI securities by an additional two percentage points. There have been other notable moves of late for this purpose as well, with the intent to raise credit offtake and boost the overall growth momentum. Quick on the heels of RBI’s $5 billion dollar-rupee swap auction last week, the central bank announced its intention to carry out another such buy-sell transaction later this month.
The latest moves will further bolster liquidity infusion, bring down forward premium on the dollar, and lower hedging costs of corporates seeking to raise funds overseas. RBI’s policy objectiveis, of course, to ease the tight liquidityconditions, improve transmission of monetary policy going forward, and lower cost of funds across the board.
Reforms should be accelerated for an active and transparent corporate bond market, so as to eschew the build-up of stressed assets and unviable loan accounts in banks. We need to boost arm’slength finance via a thriving liquid bond market, complete with vetting, disclosure and proper market design.
The move to have a functional secondary market for corporate loans makes sense. The proposed task force would suggest such norms as loan-contract standards and guidelines for digital registry, including ease of due diligence. But while this market is warranted, a thriving secondary market for corporate bonds can no longer be much delayed.
The risks of continuing with the current easy option of private placements of corporate bonds with institutionalinvestors are entirely avoidable, never mind if the bond issuer presently enjoys high credit rating on attendant interest and principal payments. The latter’s credit rating can summarily change in the future. The way ahead is to induce an active corporate bond secondary market for routine information disclosure and follow-through action.
There has, indeed, been a huge uptick in the issuance of corporate bonds, but mostly by way of private placements.
Consequently, secondary market trading remains lacklustre. The recent IL&FS fiasco would have been largely avoidable, and timely corrective regulatory action more forthcoming, in the backdrop of an active and liquid bond market. It would have meant regular feedback loops and routine disclosure of operational parameters. We can’t afford to wait for adverse credit events like outright default on bond payments.
Timely pre-emptive corrective action must be taken by policymakers.
This week’s RBI policy statement says the process of implementing international settlement of government securities by International Central Securities Depositories (ICSDs), as announced in Budget 2014-15, will soon begin in consultation with ICSDs. We require arm’s-length price discovery and efficiency by, say, non-residents in government securities. A more efficient market for the latter will also positively impact the corporate bond market.
Alongside, we need to increase sustained demand for corporate bonds. And, here, RBI can progressively opt for conducting its liquidity adjustment functions via the instrument of repurchase obligations, or repo, in corporate bonds.
An active market for credit default swaps should also facilitate hedging of credit risks by holders of corporate bonds. While the investment guidelines for foreign portfolio investors in corporate bonds have been duly liberalised of late, the norms for their issue and re-issue need to be duly streamlined as per international securities standards and codes.
Published On : 05-04-2019
Source : The Economic Times
