Here's what Moody's says on RBI measures

MUMBAI: The Reserve Bank of India has announced a raft of measures, aimed at expanding reach of corporate bond and currency derivative markets.

Global rating company Moody's has analyzed those measures and its impact.

Here's a synopsis:

More Liquidity & Investors
The introduction of an electronic dealing platform for repo in corporate bonds, and the advancement of legal measures to allow corporate bonds to be included in the RBI Liquidity Adjustment Facility ( LAF) will foster corporate bond market liquidity, and potentially attract more diverse investors and issuers, thereby deepening the market.

Expectations
Moody's expects that the RBI will announce at a later stage measures that would help fully develop the market. Among the key structural issues that have yet to be addressed are the following:

- Some 95 per cent of corporate debt issued so far have been dominated by private placements through banks; highlighting the bank-dominated financial system in India;

- The investment mandates of institutional investors such as insurance companies, pension funds and provident funds do not permit large investments in corporate bonds;

- There is a lack of functional trading systems for corporate bonds; thereby impeding the growth of a secondary market.

- The market for credit risk protection instruments like CDS have yet to be developed.

Masala Bonds
The new guidelines permitting banks to issue Basel-III compliant additional Tier 1 (AT1) and Tier-II securities by way of rupee denominated bonds overseas are credit positive, because they will help create an alternative funding source for the banks’ capital needs.

Banks currently face significant challenges in raising AT1 capital in the domestic market, given the complex nature of these instruments and the shallow domestic bond market.

Furthermore, most of the domestic AT1 issuance has been privately placed, thereby providing investors with limited liquidity.

"We expect that only well-rated and well-managed banks will be able to tap the international market."