Weekly Current Affairs

Banks to issue Masala bonds, RBI opens currency markets [Economy]

  • The Reserve Bank of India (RBI) has announced a raft of measures to boost investor participation and market liquidity in both the corporate bond and currency markets.
  • The central bank will allow commercial banks to issue rupee bonds in overseas markets — known as Masala bonds, both for their capital requirement and for financing infrastructure and affordable housing.
  • Accepting many of the recommendations of the Khan Committee to develop the corporate bond market, it has been decided to enhance the aggregate limit of partial credit enhancement (PCE) provided by banks, permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds and encourage credit supply for large borrowers through market mechanism.
  • It has been now been decided by the regulator that the aggregate PCE that will be provided by the financial system for a given bond issue will be increased from the present level of 20 per cent to 50 per cent of the bond issue size, subject to the PCE provided by any single bank not exceeding 20 per cent of the bond issue size and the extant exposure limits.
  • RBI has also been decided to seek suitable legal amendments to enable it to accept corporate bonds under the Liquidity adjustment Facility (LAF).
  • In order to ease access to the foreign exchange market for hedging in over the counter (OTC) and exchange-traded currency derivatives, the RBI has allowed entities exposed to exchange rate risk, both resident and non-resident, to undertake hedge transactions with simplified procedures, up to a limit of $30 million at any given time.
  • The exposed person will be free to access any market (OTC or exchange) and use any of the permissible products at his discretion.
  • To enhance participation in the corporate bond market, the RBI has decided that brokers authorised as market makers will be allowed to participate in the corporate bond repo market. This measure is expected to meet their funding and securities requirement arising out of market making activities.
  • With an aim to reduce risk in banking sector, RBI has proposed to limit exposure of a bank to a business group to up to 25 per cent of its capital, down from the existing 55 per cent.