Base rate may breathe life into corp bonds

MUMBAI: Secondary market activity in corporate bonds, which has yet not taken off, is expected to pick up with the introduction of the Base Rate system.

The introduction of the system with effect from July is expected to push more top-rated corporates to raise funds by issuing bonds as banks can no longer lend below their benchmark rates. Most banks have their base rate in the range between 7.5% and 8.5% while there are a few top-rated corporates who have borrowed at lesser rates before the new regime.

At present, the secondary market for corporate bonds is very small and consists largely of banks. The few sellers are usually those who warehouse corporate bonds for trading while a large number continues to hold bonds until maturity.
On Friday, RBI said banks and institutions should report repo deals through the Fixed Income Money Market and Derivatives Association of India (FIMMDA) — a move that would increase information on such deals.


FIMMDA’s reporting platform for repos in corporate bonds will act as a trade repository for market participants. The platform has been prepared by Clearing Corporation of India for FIMMDA. Each time a deal is struck, each participant will reveal details like nature of deal (borrow/lend), description of security, counterparty details, rating of bond, the consideration and details of the intermediary.

Although RBI has permitted repos in corporate bonds from early this year, there have not been many transactions.
“Though the platform has been opened, I haven’t seen a single deal being reported. This is because of the very small number of deals happening in corporate bonds. Most banks prefer the government securities for its sheer scale, liquidity and standardisation.”

But there is hope that repo activity in corporate bond may yet pick up. According to Mandar Pitale, head of government securities trading — IndusInd Bank, “With this platform coming in place, it will help better price discovery. In the absence of the platform, it was difficult for traders to know the market rates. It was a long winding process based on assumed arbitrary pricing with enormous chances of price clustering around a particular range, due to lack of transparency. But now, repo rates would get priced well efficiently.”

Rugved Dhumale, AVP —Risk Management Solutions, Mecklai Financial, said: “In the medium term, corporates will be pushed to the bond markets as it will be a cheaper and efficient way of raising money. By then, investors and dealers would have taken to the new electronic platform, which is bound to bring in more liquidity and more efficient price discovery.”