RBIs R Gandhi warns not to squeeze out bank finance to ‘force feed’ corp bond market

By: | Updated: September 28, 2016 8:51 AM

Speaking at seminar organised by industry body CII on challenges in developing the bond market in BRICS, Gandhi said we must be “realistic” in our goals when talking about developing the corporate bond market.

Pointing out that developed economies such as Germany, Japan and China have achieved economic success based largely on a bank-financed model, Reserve Bank of India (RBI) deputy governor R Gandhi on Tuesday said India must be cautious about not squeezing out bank finance in an effort to “force feed” the corporate bond market. (Reuters)Pointing out that developed economies such as Germany, Japan and China have achieved economic success based largely on a bank-financed model, Reserve Bank of India (RBI) deputy governor R Gandhi on Tuesday said India must be cautious about not squeezing out bank finance in an effort to “force feed” the corporate bond market. (Reuters)

Pointing out that developed economies such as Germany, Japan and China have achieved economic success based largely on a bank-financed model, Reserve Bank of India (RBI) deputy governor R Gandhi on Tuesday said India must be cautious about not squeezing out bank finance in an effort to “force feed” the corporate bond market.

Speaking at seminar organised by industry body CII on challenges in developing the bond market in BRICS, Gandhi said we must be “realistic” in our goals when talking about developing the corporate bond market.

The deputy governor’s comments came after the central bank had last month announced measures to help deepen the domestic corporate bond market.

The measures, which were part of the HR Khan committee report, included allowing banks to use corporate corporate bonds for overnight liquidity adjustment facility operations, allowing foreign portfolio investors to trade directly in corporate bonds, and permitting banks to provide partial credit enhancement of up to 50% of the bond issue size, against 20% earlier.

Economic affairs secretary Shaktikanta Das, who was present at the event, confirmed that the measures would be implemented within six months.

“Emerging economies produce 39% of global output, yet they account for only 14% of the global corporate bond market value. This suggests that emerging economies may be able to better utilise corporate bonds to finance their private sector and, consequently, their growth. Furthermore, as the landscape for bank-intermediated financing transforms under regulatory reforms and technological advances, the need and opportunities for domestic corporate bond markets development are apparent,” Gandhi said.

The central banker also stressed the importance of creating new categories of investors in order to address the issue of finding investors willing to buy low-rated bonds, adding that simply loosening investment guidelines for insurance firms and pension funds would not be enough.

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