The Reserve Bank of India (RBI) will soon issue fresh guidelines on credit default swaps (CDS), a financial derivative instrument to hedge risks in bond investments, a senior Finance Ministry official said on Thursday.
The development of CDS is considered critical for deepening India’s bond markets and the government believes that the enactment of the Bilateral Netting of Qualified Financial Contracts law this month should pave the way for an active CDS market.
Talks with regulators
“The government is working with financial sector regulators, SEBI, RBI, IRDA and PFRDA to build a robust and vibrant bond market,” said Anand Bajaj, Additional Secretary, Department of Economic Affairs.
“The traded volumes in our bond markets in 2019-20 were not much at ₹19-₹20 lakh crore, while 98% of debt issuances were made through private placements,” Mr. Bajaj added. Stressing that fair valuation of bonds is a challenge when trading is limited, he said that to facilitate the development of the CDS market, the central bank would issue revised guidelines soon and more steps are in the offing to boost the bond market, especially as it would play a key role in funding infrastructure.
“We think that enhancing the bond markets is very important for the requirement of infrastructure financing, particularly the projects lined up in the National Infrastructure Pipeline,” he said at an Assocham event.
NFBCs cautioned
Earlier in the day, Chief Economic Adviser Krishnamurthy Subramanian also made a pitch for CDS to make India’s financial markets more vibrant, while urging non-banking financial companies (NBFCs) to lend cautiously and enhance their risk assessment systems.
“Forbearance is necessary in today’s context, but zombie lending could come back to bite later,” he said, adding that the impact of such lending by NBFCs after 2008-09 should serve as a reminder of how it could affect the economy.
“After the 2008-09 global financial crisis, lending to firms with an interest coverage ratio of below one, had gone up significantly,” he said at a conference organised by FICCI.
“NBFCs face rollover and interconnected risks such as liquid debt mutual funds investing in papers issued by NBFCs. Every NBFC should monitor these risks even as the regulators are doing this,” said Mr. Subramanian.
Published - October 29, 2020 11:02 pm IST
