RBI to release final norms for tri-party repo on corporate bond in August
Mumbai: The Reserve Bank of India (RBI) said on Wednesday it will release final norms for tri-party repo on corporate bonds later this month—a move which is expected to aid market development.
Tri-party repo is a type of repo transaction where a third entity called tri-party agent will act as an intermediary.
This agent will facilitate services such as collateral selection, payment and settlement, custody and management. Typically, a repo transaction happens between two entities, wherein the borrower raises funds by selling securities with the promise to repurchase the securities on a specified date at a mutually agreed price.
The introduction of a tri-party repo was part of the recommendations of the H.R. Khan committee’s report on the development of the corporate bond market.
“Introduction of tri-party repos will likely contribute to better liquidity in the corporate bond market, thereby providing markets an alternate repo instrument to government securities repo,” RBI said in a statement.
Increasingly, companies, especially those rated well and non-banking financial institutes, have been fulling their fund requirement through the bond route rather than solely depending on bank loans. This is to take advantage of cheaper borrowings as transmission of the previous rate cuts was faster in the bond market, according to bond dealers.
Despite this, liquidity and price discovery is the biggest challenge in the bond market, because secondary market trades are far and few due to limited participation by long-term investors such as insurance companies and pension funds.
Hence, other investors are cautious in buying bonds other than top-rated securities in the fear of getting stuck with the security till maturity.
Tri-party repo will also pave the way for allowing corporate bonds for RBI’s liquidity adjustment facility (LAF), something the Khan committee had also noted.
Under the LAF window, banks can borrow from RBI by pledging government bonds and treasury bills as collateral. Corporate bonds are not allowed under this window.
In the past, the RBI had said it was considering making corporate bonds LAF acceptable; however, the move is not expected to in the near future as it would require amendment to the RBI Act.
“LAF in corporate bonds will give a boost to the market because investors can take comfort from the fact that the securities can drive liquidity under the RBI window,” said Soumyajit Niyogi, associate director at India Ratings, the local arm of Fitch Group.