Budget proposal to stimulate corporate bond market

The government’s proposal to form an institution that will buy and sell corporate bonds is likely to stimulate the shallow secondary market, which usually turns dry in times of crisis. Corporate bonds offer an avenue for long-term funding in a country, where banks generally prefer short-term lending.

“To instill confidence among participants in the corporate bond market during times of stress and to generally enhance secondary market liquidity, it is proposed to create a permanent institutional framework,” finance minister Nirmala Sitharaman said in her budget speech on Monday.

The proposed body will purchase investment-grade debt securities not rated below BBB-, both in stressed and normal times. The move is aimed at developing the much-needed corporate bond market.

Typically in India, bonds, barring top-rated papers, do not have adequate secondary market liquidity, which enables investors to buy or sell it freely.

“The idea of forming such an institution should help if it is implemented following a timeline,” said Ajay Manglunia, managing director – debt capital market,

. “The move should be seen in sync with the RBI that has been focussing on corporate bonds.”

In March, the corporate bond market turned extremely arid amid fears of redemption pressure following a select bond default. The Reserve Bank of India had to introduce a liquidity window, christened as targeted long-term repo (TLTRO), where banks can borrow only to subscribe bonds of non-bank entities.

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