Month: February 2021

Unification of Government Security and Corporate Bond markets is an idea whose time has come, according to SEBI Chairman Ajay Tyagi.

“A unified market would enable trading of Government Securities (G-Secs) on the same platform as corporate bonds, thereby utilising common infrastructure for trading, clearing, settlement and holding of securities

“This would lead to seamless transmission of pricing information between G-Secs and corporate bonds,” said Tyagi at the ‘CRISIL 6th Bond Market Seminar.’

The SEBI chief emphasised that corporate bonds, which are generally priced on the basis of G-Secs of comparable maturity, would therefore be more appropriately priced.

The proposal would lead to economy of scope and scale, and increased liquidity for both G-Secs and Corporate Bonds, he added

This would also facilitate greater participation by retail and non-institutional investors.

Tyagi observed that the total amount mobilised from the corporate bond market this financial year till January 2021 was ₹6.54-lakh crore, which is around 22 per cent higher than the funds raised in the corresponding period last year, Tyagi said.

Outstanding corporate bonds are now around one-third of the outstanding bank credit to commercial sector, he added.

“The annual number of issuers raising capital from the corporate bond markets decreased from 368 in 2016-17 to 291 in 2019-20. As compared to this, in this financial year till January 2021, 373 issuers have raised funds from the corporate bond market,” SEBI chief said.

The majority of the issuances are by financial issuers who contributed around 65-75 per cent of amount issued during the last 5 years.

The SEBI chief noted that with pandemic-induced stress adding to the NPA (non-performing asset) woes of banks and their inherent asset-liability mismatch problem restricting their capability to fund infrastructure projects, the need for corporate bonds to finance the Government’s development agenda gets further accentuated.

The government has envisaged an investment of ₹111-lakh crore in infrastructure projects over a 5-year period under the National Infrastructure Pipeline.

Secondary market

“Talking about trading in the secondary market, though the trading volumes have witnessed growth over the years, on an absolute basis the level of liquidity is quite low with average daily turnover of around ₹8,500 crore during 2019-20 and ₹7,800 crore during 2020-21 (till January 2021).

Even within this low liquidity, 97 per cent of the trading is concentrated in bonds in the top three rating categories of AAA, AA+ and AA,” Tyagi said.

DFI

Referring to the Budget announcement regarding setting up of a professionally managed Development Financial Institution (DFI) for debt financing of infrastructure, SEBI chief said: “It is our view that the mandate of DFI should also include provision for equity financing.

“Of course, considering the huge debt financing requirements of infrastructure projects, DFI funding would need to be necessarily supplemented in a big way by direct corporate bond borrowings by such projects.”

Our Bureau

The Reserve Bank of India (RBI) has decided to exempt scheduled commercial banks’ (SCBs) exposure to foreign sovereigns or their central banks from the large exposure framework (LEF).

Under LEF, a bank’s exposure to all its counterparties and groups of connected counterparties, excluding certain exposures, are considered for exposure limits.

RBI said exposures to foreign sovereigns or their central banks that are subject to a 0 per cent risk weight; and denominated in the domestic currency of that sovereign and met out of resources of the same currency of all SCBs to foreign sovereigns or their central banks are exempt from LEF.

The aforementioned SCBs excludes Small Finance Banks, Payments Banks, Local Area Banks and Regional Rural Banks.

Government security (G-Sec) yields thawed a shade on Wednesday on hopes that the Reserve Bank of India (RBI) will not shy away from conducting open market operations (OMO) to keep the yields from rising.

The central bank, on Wednesday, announced that it will conduct a special OMO, entailing simultaneous purchase and sale of G-Secs aggregating ₹15,000 crore eachon March 4.

Yield on the benchmark 10-year G-Sec (5.85 per cent GS 2030) nudged down about 2 basis points (to 6.1473 per cent), with its price increasing by 18 paise (₹97.83) over the previous close. Yield and price of bonds are inversely related, moving in opposite directions.

Since January-end 2021, yield on the aforementioned G-Sec has jumped about 24 basis points and its price declined by about ₹1.75.

Due to the fall in G-Sec prices, banks are staring at mark-to-market (MTM) losses in the fourth quarter. If the losses persist till the end of the quarter, they will have to make provision towards investment depreciation. This could have adverse implications on their profitability.

“This financial year, that is 2021 from April till now, we have done a total open market operation (OMO) of more than ₹3-lakh crore.

“Considering the borrowing requirement of next year, there is no reason why the RBI should do less OMO in the next year, that is 2021-2022, than what we did in the current year,” the RBI Governor Shaktikanta Das told a news channel.

Das reiterated that orderly evolution of the yield curve is a public good, and it entails a responsibility both for the central bank and for market players.

Under the special OMO (also known as Operation Twist), the RBI will purchase four G-Secs (maturing in 2024, 2027, 2031 and 2035), and simultaneously sell two G-Secs (maturing in November 2021 and 2022) aggregating ₹15,000 crore each on March 4.

The central bank is trying to soften the yields on G-Sec at the longer end via Operation Twist. This will ensure that the cost of borrowing for the government as well as India Inc is reasonable. G-sec yield curve serves as a benchmark for the pricing of corporate debt instruments