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October 24, 2001
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RBI policy seen boosting corporate debt market

India's corporate debt market is set to become more transparent and usher in better trading practices thanks to measures announced in the central bank's mid-year monetary policy review, traders said on Tuesday.

But investments by banks in the primary market could temporarily decrease as a result of stricter accounting and prudential norms that the Reserve Bank of India plans to introduce, they told Reuters.

On Monday in its policy review, the RBI said it will soon put in place measures for adequate information dissemination. It asked banks to adopt internal rating systems before investing in bonds issued through private placement.

The RBI said it will later issue detailed operating guidelines in consultation with banks and financial institutions, but did not specify a time-frame.

Analysts expect these moves to streamline the functioning of the much-neglected corporate debt market by ensuring compliance with tighter investment norms, especially by banks and financial institutions.

"The move on the whole is a positive one for the market," said Kaushik Modak, vice-president and head, Fixed Income Securities Group at Kotak Mahindra Capital Company.

"It will increase accountability on the part of the issuers and arrangers as well make the process more structured."

Some analysts, however, feel the process could drive away banks.

"Banks will fight shy of investing in the primary market," said Tarun Saigal, head of fixed income at Standard Chartered Bank, adding that the new procedures would be time-consuming and involve a lot of technicalities.

Banks are among the largest investors in bonds, although they have traditionally been more active in the less risky government securities market.

Debt dealers expect the new guidelines to hurt investment in bonds of state-run firms, especially those issued only against a guarantee or a letter of comfort from the government as banks may be reluctant to invest unless these instruments are rated.

Currently, banks invest in such debt on the strength of the government guarantee.


The central bank also pushed for converting existing bonds and debentures into paperless form by June 2002, a move first announced in the credit policy announcement in October 2000.

This is expected to reduce processing time.

The RBI also reiterated that fresh investments in bonds must be in paperless form starting from October 30.

Dealers expect this to push up volumes in the corporate debt market, which is generally seen as illiquid due to a 15-day to two-month gap between striking a deal and transferring the instrument in the investor's name.

Daily volumes average around Rs 500-600 million, a far cry from the Rs 20-40 billion traded in the government bonds market.


The market for primary debt was hushed through most of September in the immediate aftermath of the terror attacks in the United States, with only a few state-run banks and financial heavyweights stepping in to raise funds from the market.

It started to pick up gradually in October as investor confidence improved after fears of pressure on the rupee waned and as inflation remained benign.

Some dealers, however, are concerned the market may again screech to a halt till the implications of the guidelines are clarified.

A downgrade of bonds of some leading companies in recent weeks may also sap the bond market of some of its momentum, some dealers said.

Other debt dealers, however, were of the view that most of the downgrades were expected and already factored in, and would therefore have little impact on secondary trade.

"During a period of slowdown, downgrades are more or less expected," a senior dealer at a private bank said.

"Depending on credit quality, the paper would go from being traded 100 basis points over other paper to around 150 points above the market; in the long-run, yields would realign".

The Monetary & Credit Policy

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