Supply of government bonds chokes growth of corporate bonds: RBI Deputy Governor

MUMBAI: Huge supply of government bonds is chocking the growth of corporate bonds, Reserve Bank of India's Deputy Governor R Gandhi said on Monday.

“The huge supply of government paper in the country is one of the major impediments to the growth of corporate bond market,” Gandhi said while attending a conference organised by Care Ratings.

“Government borrowing and thereby a supply of government paper are seen to grow unabated. We have seen that the government is trying to rein in the deficit at absolute level which will put less pressure on the market.”

Gandhi's comments come at a time when the Union Budget proposed to set up an independent public debt management, relieving RBI of such responsibilities. Some proposed amendments of acts also hint at shifting secondary market trading for government securities to the Securities and Exchange Board of India from the RBI.
The government will borrow Rs 6 lakh crore from the market in 2015-16, up from Rs 5.92 lakh crore in the current fiscal.

The fiscal deficit, or excess of government expenditure over revenues, has been estimated at 4.1% of gross domestic product, and the government is hopeful of narrowing it further to 3.9% in 2015-16.

The deputy governor also sees a role for institutional investors like pension funds and insurance companies in shaping the corporate bond market.

“They need to take some initiative and be aggressive in actively managing their portfolios. Their investment horizons should not be confined to AA and above instruments only,” Gandhi said, adding that there's a need to reassess the role played by institutional investors in the corporate debt market.

Corporate bond issuance growth has been sluggish in the past 10-years or so. Between financial years FY03 and FY14, it grew to 3.72% of the country’s GDP to 2.44% earlier, data from Care Ratings show.

Government bond issuances formed more than 60% of the GDP in FY14.

“Demand (for corporate bonds) from institutional investors is limited,” Seshagiri Rao MVS, Jt. Managing Director & Group CFO, JSW Steel, told ET.

“Most of the funds are going to government bonds. There is no money available to the private sector. If you go to any pension fund, 65% has to be invested in government bonds,” he said.

Gandhi also said the RBI's move to gradually reduce the Statutory Liquidity Ratio (SLR), or the portion of deposits banks keep in sovereign securities, will also benefit the corporate debt market.

Since RBI governor Raghuram Rajan took charge in September, 2013, the central bank has cut SLR by 150 bps to 21.50% from 23% earlier.

RBI has been closely monitoring foreign institutional investors' greater participation in corporate bonds. FIIs have exhausted 74% of their $51 billion limit so far compared with 40% six months ago.

The central bank has to strike a fine balance when it comes to foreign holdings of Indian bonds, given the need to be mindful of the country's external debt, Gandhi said.

He said allowing re-issuance of corporate bonds can also help in market development.