The Reserve Bank of India (RBI) is planning to do overnight corporate repos — where market participants can borrow money in exchange for corporate bonds — to boost the market.
The repos are likely to be done only for AAA-rated papers. Currently, this is an underdeveloped market with hardly any liquidity. If the central bank starts doing repo, it will lead to an increase in liquidity of corporate bonds — an issue that is still plaguing the debt segment.
The repos are likely to be done at LAF rate — possibly at variable rates depending on the type of securities.
Market participants indicated that this would be a key step towards increasing the liquidity of the corporate bond market. One of the problems plaguing the
debt market is liquidity as a result of which issuers end up paying some kind of liquidity premium.
Interest in corporate bonds has been waning even with foreign portfolio investors in recent times, with additional quota for government securities being opened up.
The latest depository data shows that FPIs have utilised only 66.30% of their allotted quota of Rs 2.44 lakh crore.
NS Venkatesh, executive director and chief financial officer at IDBI Bank, said this would be a critical step towards the development of the repo market. “This would be a key step towards improving the liquidity of the repo market which is not quite developed as of now. With the central bank coming into the picture, many other market participants would also start doing repos, thereby increasing the liquidity in this segment.”
As a result of this, banks which might be in need of urgent overnight money will have an additional source of funds as they could use corporate securities to borrow money.