Mumbai: Reserve Bank of India (RBI) deputy governor Shyamala Gopinath said in an interview that all financial sector regulators need to do their bit to boost India’s sluggish corporate bond market, as it can play a major role in financing long-term projects. Edited excerpts:

The corporate bond market is not growing as fast as people want it to grow. What is holding it back?

Growth catalyst: RBI deputy governor Shyamala Gopinath says the corporate bond market can play a major role in financing projects. Ramesh Pathania / Mint

But yes, all financial sector regulators have an important and a critical role to catalyse the corporate bond market because of its major role in financing long-term projects.

Of course, one reason for the slow corporate bond market development has been the very positive role played by the banks in terms of intermediation. But even otherwise, if the corporate bond market has to develop, we need to deal with both the supply and the demand side issues.

Are your saying there isn’t enough demand from investors, insurance companies and pension funds? Is that what is holding it back?

There is demand from insurance players and pension fund investors, but their demand is for a certain quality of bonds. For instance, they are interested in long term, no doubt, (and) they are credit-risk-averse. So they are interested in highly rated bonds and, therefore, you find that the supply of bonds also are issued (for) their own requirements. Therefore, you find the corporate bond market is dominated by issuers such as banks, financial institutions, public sector entities.

They are all rated well and high, and the investors have great confidence. The other supply-side issue is that the large corporate players which can easily issue AAA-rated bonds, or even AA-rated bonds, are accessing overseas markets. So they prefer to access the overseas markets rather than raise funds in India for obvious reasons.

So the category that is not coming into the market perhaps is the BBB, just below the best. One way to work one’s way out of this could be credit default swaps. Do you think that we will see that market before 2010 is over?

Yes, in fact, the credit default swaps have come in for a whole lot of reforms even internationally. There are even questions being raised on whether it is a socially useful product or not. But clearly, that is not the case with the plain-vanilla credit default swaps; they have a very important role to play (in) ensuring the development of the corporate bond market itself because the existence of this instrument will promote liquidity in corporate bonds.

So this is very much on our agenda and we have already looked at international practices and (are) positive that we will have the draft report placed for public comments in July and we will introduce this product, initially maybe through the OTC (over the counter) market with a reporting platform and then I think we should be going forward to improve the market structure.

So you are expecting that before 2010 is over, we should be able to have credit default swaps.


The credit policy said shorter-term interest rate futures will also be introduced. This is the second time that we have an interest rate futures product; the one that is already trading has been quite a disaster. Will you consider cash-settled (products) at all?

Let me give you some perspective on this—the 2003 product that we had, the interest rate futures product was cash-settled and it didn’t take off. So I think one has to look beyond that and we have this technical advisory committee on forex markets, there was a working group that was set up by that committee which included not only RBI, but also other market players, industry associations, Sebi and academics.

This particular group recommended physical settlement of not only the 10-year (product), but also other products along the yield curve and a 91-day T-bill (treasury bill) futures cash-settled. Of course, they recommended a calibrated way of introducing these products. We selected the 10-year IRF (interest rate futures) because that was the segment of the yield curve that was most liquid and we have a large supply of deliverable securities but, true, the market has not taken off for certain reasons which I can explain separately.

But one thing we need to be very clear is that we have to operate within a certain macroeconomic framework and financial stability is clearly the objective. Whatever products we introduced, we need to have the financial stability objective and within that we are more than willing to introduce new products. That is why even though the 10-year (product) has not taken off, we are willing to introduce new products like two-year, five-year and the 91-day treasury bill futures.

What will be the timetable?

We are quite flexible. Certainly, 91-day T-bill features can be introduced in a shorter time frame because we do have 91-day issuances of treasury bills every week and there is clearly a benchmark price and that is something that can take off sooner than later and two-year, five-year also will follow. So it is not as if we are going to be doing it in a certain time frame, we would like to have all the products on board.

Why is cash-settled feared as possibly harming the system?

No, it is not just the cash-settled. It’s is an issue for macroeconomic stability. Let us look at the financial markets overseas. In all the developed markets, where you have interest rate derivatives, they are all physical deliveries, they are all physical settlements because the futures prices have to have a connect with the cash price. They cannot be at variance. Then the product does not fulfil a basic need of the market and that is hedging. If you are saying you want interest rate futures market for hedging, then you have to have that connect between the futures price and the cash price.

Why does RBI appear to be so fearful of FIIs (foreign institutional investors) in debt?

True, FII investment in these markets which have as their base macroeconomic variables like interest rates and exchange rates are viewed with caution, mainly because of the impact it has on the volatility of the underlying issue, and this has an impact on the entire economy. It is not like a stock future or an equity product (in) which the price volatility may not impact the whole economy... So, in that context, we are circumspect.