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RBI policy to boost corporate debt market

India's mostly dormant corporate debt market is expected to get a boost from Reserve Bank of India's new initiatives but there will be a lull in commercial paper volumes initially, traders said on Friday.

New investments in corporate bonds by banks, primary dealers and financial institutions must be in paperless form from October 30, the RBI said in its annual monetary policy on Thursday.

"Dematerialisation will reduce transaction costs as well as the risk of handling physical instruments," said Kaushik Modak, vice-president and head of Fixed Income Securities Group, Kotak Mahindra Capital Company.

"Credit and pricing alone will become the key variables and this should boost volumes in the corporate debt market."

The corporate debt market is generally seen as illiquid due to a 15-day to two-month gap between striking a deal and transferring the instrument.

India's market for corporate debt has improved considerably over the last five years, with volumes rising three-fold in that period, but it is still far from liquid.

Daily volumes average around Rs 350-400 million, a far cry from the Rs 20-40 billion traded in the government bonds market.

The RBI said that current investments in bonds and debentures will have to be converted into paperless form by June 2002.

This is expected to speed up processing time and allow traders to act on a long-term view.

"The move towards dematerialisation is a good thing and we should see volumes rising," said Narendra Gupta, head of domestic treasury at ICICI Bank.

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For fresh investments in commercial paper, the RBI set June 30 as the cut off date for dematerialisation.

That is expected to raise costs initially and affect activity, which would be reversed as speedier transfers drive volumes over the longer term.

"Dematerialisation in commercial paper will take the shine off the market," Tarun Saigal, head of fixed income at Standard Chartered Bank in Bombay, said.

Commercial paper is a short-term instrument, with maturities up to one year, transferable by endorsement and delivery, which currently carry no transaction costs.

Some dealers fear that once trade moves to the paperless form, costs will increase as the transaction will be routed through a depository participant who will charge a fee.

"Small players in the commercial paper market will be hit," Saigal said.

But in the longer term, paperless trade will benefit the commercial paper market as risks will come down, traders said.

"With the move to paperless trade, the depository effectively takes the responsibility of a large part of the documentation and dealers only have to look out for credit risk," said a dealer at a brokerage.

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