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India central bank's move to allow standalone primary dealers (PDs) to obtain funding and invest more in corporate bond markets is expected to increase volumes in a priority market for the Indian government, according to executives.
The move, announced by the Reserve Bank of India late on Wednesday, comes as India looks to deepen its corporate bond markets to meet the funding needs of domestic companies.
The RBI on Wednesday allowed PDs to borrow up to 50 percent of their net owned funds (NOFs) in overnight call money markets for investment in corporate bonds.
RBI uses NOFs to calculate the funds available at primary dealers by deducting certain variables such as deferred revenue spending or intangible assets.
Previously PDs were not allowed to do so in call markets, though they were able to borrow up to the same amount in money markets of other maturities.
They can also borrow up to 150 percent of net owned funds as of the end of March of the preceding financial year through Inter Corporate Deposits, or unsecured loans extended from one company to another.
The new limit is double of the previous one.
"In the absence of corporate bond repo funding, the permission to use call money to fund corporate bond books will help PDs to carry a larger book, which in turn will aid in market-making in corporate bonds," said Pradeep Madhav, managing director at STCI Primary Dealership.
Primary dealers can also invest up to 10 percent of its total capital funds in tier II bonds issued by other PDs, banks and financial institutions.
The new measures comes after the central bank relaxed some of the rules for foreign institutional investors (FIIs) buying into domestic debt as part of the government's long-expected $10 billion increase in corporate and government debt limits.
Earlier this month, the RBI also allowed securities with less than one-year maturity to be included as underlying securities for repo borrowings in corporate bonds and credit default swaps (CDS).