Eight takeaways from RBI's new measures for bond market development

In its effort to breathe new life into the Indian corporate bond market theReserve Bank of India on Thursday announced a slew of measures. 

"These measures are intended to furthermarket development, enhance participation, facilitate greater market liquidity and improve communication," the central bank said in a statement. 

Here are eight key takeaways from the RBI's new guidelines for the bond market. 

1) PCE ceiling raised to 50%: To provide a further impetus to the corporate bond market, it has been decided that the aggregate partial credit enhancement (PCE) that may be provided by the financial system for a given bond issue will be increased from the present level of 20% to 50% of the bond issue size subject to the PCE provided by any single bank not exceeding 20% of the bond issue size and the extant exposure limits. The necessary guidelines will be issued shortly. 

2) Masala Bonds for Tier - I, II capital: With a view to develop the market for rupee denominated bonds overseas, it is proposed, in consultation with the Government, to permit banks to issue Perpetual Debt Instruments (PDI) qualifying for inclusion as Additional Tier 1 capital and debt capital instruments qualifying for inclusion as Tier 2 capital, by way of rupee denominated bonds overseas. 

3) Masala Bonds for infra funding: It is also proposed to allow banks to issue rupee denominated bonds overseas under the extant framework of incentivising issuance of long term bonds by banks for financing infrastructure and affordable housing. 

4) Brokers in repo corporate bonds: In order to encourage activity in the corporate bond market, brokers authorized as market makers will be allowed to participate in the corporate bond repo market. This measure is expected to meet their funding and securities requirement arising out of market making activities. 

5) Direct trade in corporate bonds for FPIs:To facilitate direct trading in corporate bonds by FPIs in the OTC segment and on an electronic platform of a recognised stock exchange, it has been decided, in consultation with SEBI, to allow FPIs to transact in corporate bonds directly without involving brokers. Necessary changes to FEMA regulations shall be made shortly. 

6) Retail participation in treasuries: RBI will remove the remaining restrictions on seamless transfer of Government securities between depositories and RBI. This should promote retail participation in the market by facilitating participation by small investors in primary as well as secondary markets. 

7) Corp bonds for LAF: To promote development of the corporate bond market, following emerging international practice, RBI is actively considering corporate bonds as eligible collateral for liquidity operations. The process to make necessary amendments to the RBI Act has commenced. 

8) Removing 7-day restriction: Currently, listed companies can lend through repos in G-sec for a minimum tenor of seven days to banks and PDs, which constrains their participation. It is proposed to allow such companies to lend through the repo market, without any tenor or counterparty restrictions.