FOCUS: RBI ensures takers for corporate bond by nudging banks to invest
Cogencis, Friday, Mar 27
By Bhakti Tambe and Sanjana Raina
MUMBAI/NEW DELHI: The Reserve Bank of India today hit the nail on the head by giving a reprieve to corporate bond and commercial paper market from the relentless selling by mutual funds and easing the pressure on yields.
The central bank today announced it would conduct “targeted” term repos of three-year tenures for up to 1 trln rupees in tranches to provide liquidity to banks, and commercial paper and corporate bond markets.
The RBI mandated banks to invest the additional liquidity availed of through the targeted long-term repo operations in investment grade corporate bonds and commercial papers.
The RBI said banks will have to buy up to 50% of these papers from the primary market and the remaining 50% from the secondary market, including from mutual funds and non-banking finance companies.
Any investments made by banks under this facility will be classified as held-to-maturity even in excess of 25% of total investment permitted under this portfolio. Additionally, exposures under this facility will not be reckoned under the large exposure framework.
Yields on corporate bonds and commercial papers fell on RBI announcement.
Rates on short-term debt papers fell 150-175 bps following RBI announcement while those on corporate bonds fell 80-155 bps across tenures.
The central bank’s announcement comes at a time when yields on corporate bonds have risen to its highest level since 2011, mainly due to sell-off by mutual funds amid concern over growth in the wake of fast-spreading coronavirus.
“The objective is to provide relief to mutual funds in the secondary market, which are actually facing redemption pressure on their schemes,” said Anil Gupta, the vice-president, financial sector ratings, ICRA.
“To provide them an exit, so yields don’t shoot up and funds will be able to sell to meet the redemption pressure,”” Gupta said.
Despite the ample liquidity in the system, banks have not been deploying funds in debt capital market.
“The design of the new programme and the dispensations on fluctuation risk and exposure limits will hopefully restart banks’ appetite in quality money market and corporate bonds,” said Suyash Choudhary, head – fixed income at IDFC Asset Management.
The requirement to invest up to 50% fund in the secondary market will also help in improving the liquidity in corporate bond market.
If banks start investing in investment grade corporate bonds in the secondary market, their yields will cool off, bringing down the issuer’s cost in the primary market.
“After a fairly long time, if not first time, the RBI has done something for the corporate bonds to provide liquidity,” Ajay Manglunia, the managing director and head – institutional fixed income at JM Financial, said.
The move has not only calmed nerves and broke the panic selling cycle but also restored some confidence in the debt market, which was grappling with issues such as credit defaults and ratings downgrade besides the coronavirus scare.
In addition to banks buying bonds from them, the NBFCs can also take advantage of the three-month moratorium on term loans from bank.
The move is expected to help NBFCs, which dominate the corporate debt market, to borrow funds at cheaper rates.
The announcement will bring down the borrowing cost for all issuers, but more so for top-rated issuers, which in any case had better access to funds.
“Banks would be more careful and do due diligence and credit checks in terms of investments including in NBFCs and HFCs (housing finance companies) where they already might have credit exposures,” Manglunia said.
The central bank has made it clear that the move was aimed at stabilising financial markets, which had seen heavy sell-off due to deepening worries over the economic impact of coronavirus pandemic. By providing liquidity to banks to invest in corporate bonds, the central bank has provided a breather to the market.
However, with most places globally and domestically still in lockdown due to the pandemic, restoring normalcy in the market will take some time. “Hopefully the market will stabilise soon,” said Shameek Ray, senior vice-president and head debt capital markets at ICICI Securities Primary Dealership.
“But I have one word of caution, whether the market will be 100% effective when so many people are working from home. I don’t expect the market to go back to fully normal from tomorrow. This is the best way to start, and then we have to take it further when we come to office,” Ray said.
According to market participants, operational difficulties due to lockdowns could affect primary issuances of bonds or commercial papers, especially for companies with investment grade rating.
The central bank is trying its best to bring the debt market back on its feet, but the market is unlikely to rebound soon, especially when there are rising concern about recession, globally. End
Edited by Akul Nishant Akhoury