RBI allows participants to use municipal bonds as collateral in overnight repo transactions

The Reserve Bank of India (RBI) has allowed money market participants to pledge municipal bonds to borrow in the overnight market under repurchase transactions (Repo), the regulator said on Tuesday.

Unlisted companies that hold government securities are also deemed as eligible participants to transact in repo operations, the RBI said.

“Eligible participants include any unlisted company, which has been issued special securities by the Government of India, using only such special securities as collateral,” the RBI said in the guidelines published on its website.


On Tuesday, the RBI issued the master direction on Repurchase Transactions (Repo) wherein it took measures to deepen the bond market.

Inclusion of municipal bonds is expected to increase liquidity and acceptability of local-body debt in the market, bond traders said. Municipal bonds will carry a minimum haircut of 2%. Municipal corporations have issued bonds worth Rs 575 crore in this fiscal year. Total outstanding municipal debt stands at Rs 3358 crore, according to SEBI data.

The other eligible securities as collateral include government securities, listed corporate bonds, commercial papers (CPs) and certificates of deposit (CDs).

Repo agreement is a short-term borrowing tool in government securities markets. A dealer sells securities, agreeing to buy them back at a higher price soon after. Other government securities are used as collateral in these transactions.