Liberalise while strengthening bond markets: RBI Governor

The Dollar Business Bureau

 As companies have shifted to money markets and bond markets, the Reserve Bank of India (RBI) would liberalise steadily, while continuously strengthening the domestic markets by higher provisioning, RBI Governor Raghuram G Rajan said while delivering a lecture at Foreign Exchange Dealers' Association of India (FEDAI) annual event on Friday. 

India being a current account deficit country needs financing from overseas, preferably risk capital. The government should encourage Foreign Direct Investment (FDI) and equity investment in the country. Due to the weak bankruptcy system, there was a moral hazard built into unhedged foreign borrowing, Rajan said. 

The RBI has encouraged companies that do not have foreign exchange earnings to issue long term dollar bonds, fully hedged short term bonds, or rupee denominated Masala Bonds in the foreign markets, he explained. 

The governor further said, there would be a vibrant Masala Bond market worldwide to complement the domestic corporate bond market. The RBI allowed all banks to issue Masala Bonds on Thursday to build a global quasi-sovereign rupee yield curve. The rupee issuances could be priced easily as the bank bonds are better quasi-sovereign proxy. 

Encouraging market making in G-Sec instruments through Primary Dealers and allowing the RBI to organise repos of corporate bonds with financial institutions would impart liquidity to the instruments. The RBI will be careful on widening the retail access in markets that need sophisticated understanding like complex derivatives, the governor said. 

Rajan said that financial innovation could slice and dice risks so that they were placed on the right shoulders. The key to the success of this market has been to allow the design of the relevant instrument to be governed by market participants, while ensuring regulatory concerns are satisfied. 

All innovative instruments were not successful and going forward, a level playing field on taxes is warranted for all instruments, so that instruments do not gain favour simply because they get better tax treatment. A regulator should also create necessary infrastructure to encourage financial innovation, he added.