Analysts, market participants hail RBI move on Masala bond markets

Market participants and analysts have hailed the Reserve Bank's measures announced on Thursday to deepen the corporate bonds market, saying the move will go a long way in developing the nascent debt space.

ICRA

Welcoming the RBI measures, Karthik Srinivasan, Senior Vice-President, Icra, said, "The slew of measures announced by RBI should encourage greater participation from issuers, investors and intermediaries as it has accepted many of the recommendations of the Khan committee report." 

Specifically welcoming the move to allow banks to raise masala bonds, he said this can develop the overseas market for rupee-denominated bonds.

He also said the access to the repo window for the debt brokers, coupled with the access to trade directly on G-secs and corporate bonds for foreign portfolio investors, should improve liquidity in domestic markets.

Earlier Thursday, outgoing Governor Raghuram Rajan relaxed the guidelines for corporate bond market and allowed banks to issue masala bonds.

To improve fixed income and currency markets, RBI allowed lenders to issue 'masala bonds' and will accept corporate bonds under the liquidity adjustment facility (LAF).

Credit Suisse

Credit Suisse India's Gaurav Pradhan termed it as an extremely proactive step from RBI which acknowledges the potential of the masala bond market.

"Issuance by banks will help broaden and deepen the market for masala bonds, making the product more sustainable in the long run as a financing option. From a macro perspective, we expect RBI's move to help banks better manage their balancesheets and lower their cost of funds, and should have a positive impact on local interest rates," said Pradhan.

PWC India

Consultancy PwC India's partner Munesh Khanna said the move is in response to long-pending demand from the market.

"To meet the long-standing demand of deepening the corporate bond market, these steps... are extremely welcome. In addition, the ability of banks to issue rupee bonds for tier 1 and 2 capital and for financing infra projects augurs well for the economy," Khanna said. 

Crisil

Stating that the RBI measures will change the lending landscape, Crisil Chief Analytical Officer Pawan Agrawal said, "This is a comprehensive set of guidelines that will address multiple issues. It will reduce the disproportionate role bank loans have in corporate funding, materially improve corporate bond market liquidity and afford greater role for global investors.

"The rules will encourage innovation, sharpen focus on risk-mitigation tools. These guidelines and follow-throughs, if effectively implemented, will help the nascent domestic corporate bond market finally bloom," Agarwal noted.

On the new norms on large exposure limits, he said the guidelines to enhance credit supply to large borrowers through the market mechanism will herald better risk-based pricing culture in the banking system.

"These measures will make it costlier for banks lend to 'specified large borrowers' beyond a defined threshold. This threshold, however, still remains high. Once they get lowered over time, we would see a meaningful shift in borrowers to the capital market," he said.

On the liquidity enhancement measures, Agarwal said liquidity has been a long pending concern of corporate bond investors.

"But new steps of introducing electronic platforms... by permitting brokers in corporate bond repos, initiating inclusion of corporate bonds in LAF and allowing global investors to directly trade through stock exchanges or the OTC segment will help address this and boost confidence of both issuers and investors."

Senior Director at Crisil Somasekhar Vemuri said: "The relaxation in the limit for partial credit enhancement, from 20 per cent to 50 per cent at a systemic level, should comfortably enable corporates in the 'A' rating category and passive infrastructure projects in the BBB category to upgrade their credit ratings to the AA threshold." He added: "For a 50 per cent credit enhancement, which leads to a notch-up of a 'BBB' or 'A' category issuer to an 'AA' or 'AA+' which is preferred by investors, at least three banks will have to participate in the bond issuance. How the risks are shared between them will be critical to the effectiveness of the mechanism."

Jiju Vidyadharan, Director for funds and fixed income services at Crisil, said the gates of corporate bond market have been opened to global investors by giving them direct access to stock exchanges and the OTC segment as the move will reduce their transaction costs and provide liquidity through a larger number of counter-parties.
On letting banks issue masala bonds, he said this will lower borrowing costs over the medium to long term, but warned that given the lower ratings for these bonds, it may not be positive in the short term.