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Corporate bond market calls for dedicated RBI measures as illiquidity rises

Bhavik Nair

As illiquidity in the corporate bond market has been driving up yields in recent times, corporate bond market participants are calling for dedicated liquidity measures from the Reserve Bank of India (RBI) that has announced such operations for the government securities market over the past few days.
With most offices remaining shut and mutual funds facing redemption pressures following the turmoil in the market, experts said there is a dearth of buyers in the corporate bond market. In such an environment, dealers told FE that there is an anticipation that the RBI will bring in liquidity measures soon.

A Balasubramanian, MD and CEO, Aditya Birla Sun Life AMC, told FE that any steps announced by the RBI will calm the market which will bring back more participants. The rise in corporate bond yields in recent times is purely driven by demand-supply mismatch. With many offices getting closed, we are seeing a lack of buyers in the corporate bond market and that is leading to illiquidity. We need measures to calm down the market so that the fear factor is reduced and normal participation comes back. The RBI is expected to take some steps in terms of providing liquidity via corporate bond repos. That will ease up the pressure on the yields. Even if they announce Rs 50,000-60,000 crore of corporate bond repos, it will help boost the sentiment which may bring down the yields," Balasubramanian said.

Indeed, it is the illiquidity that is having an impact on the corporate bond yields as government securities have remained range-bound in recent times-in the range of 6.06 to 6.41% in March. In contrast, corporate bond yields have risen by at least 80-120 basis points this month.

As Ashish Jalan, assistant vice-president at SPA Securities, pointed out that a lack of direct intervention by the RBI is adding to the fire in the corporate bond market where yields are rising due to illiquidity. "The yield on three to five-year paper has gone up by 120-130 basis points. Three-year Nabard bonds were trading at around 6.40% levels while it has now gone up to 7.60%. Similarly, yield on the 10-year paper has gone up by over 80 basis points. NHAI 10-year bonds were trading at 7% around March 9 while it has been trading at close to 7.85% in recent times," Jalan said.

An RBI spokesperson did not respond to the question whether the central bank would be announcing dedicated measures for the corporate bond market. RBI has been actively taking liquidity measures by announcing to purchase government securities via OMOs. On Monday, it advanced the second tranche of its OMO purchases worth Rs15,000 crore out of a total of Rs 30,000 crore. So far, it has already conducted Rs 10,000 crore of OMO purchases. Apart from this, it has announced Rs 1 lakh crore of long-term repo operations (LTROs) as well as `1 lakh crore of variable-term repo operations.

Market participants indicate that it is the corporate bond market that now needs the central bank's attention. Ajay Manglunia, MD and head of institutional fixed income at JM Financial, told FE that cash conservation is the current norm in the market. "These are unusual times and unusual times need unusual measures. I believe that the central bank needs to step in as a few others in the world did and provide liquidity by way of repo in corporate bonds or a liquidity window directly or through banks to infuse required cash in the system," he said.