The Reserve Bank of India (RBI) is considering allowing banks to buy infrastructure bonds in a bid to jumpstart the debt market, which suffered poor trading volumes after its 2014 launch.
The move, if implemented, would mark a policy reversal for the RBI, which limited lenders to debt issuance alone, while allowing investors to include pension funds, provident funds and insurers.
However, the limitation has crippled trading volumes, as the lenders constitute the biggest buyers and traders in the debt market.
A top policymaker indicated that the RBI remained 'quite flexible' on suggestions of allowing banks to initially develop the market by buying into a certain percentage of the infrastructure bonds.
However, he cautioned that the RBI could impose limits, including on the proportion of the holding, the lenders can purchase or by limiting the ownership duration of the bonds, wherein the lenders would have to sell the bonds to long-term investors, after a certain window of time.
The RBI's concerns centres around risk being excessively concentrated on the debt markets. The banks, as the biggest issuers of debt, could also end up becoming the biggest buyers of debt, which could see banking institutions ending up purchasing each other's bonds.
The RBI launched the infrastructure bond scheme a year ago to help the government meet its plan to provide affordable housing to all by 2022. The goal needs $2tn in investments.
The proceeds from the bond sale is to be used for funding infrastructure projects.
Axis Bank's senior vice president and head of investments Shashikant Rathi, was of the view that allowing banks to invest in the infrastructure bonds, would bring in more liquidity to the primary and secondary bond markets, reported Reuters.
Since its August launch, infrastructure bond issuance has reached only about 150bn or $2.42bn, against expectations of about 500bn worth of debt to be raised in the first year.
RBI Governor Raghuram Rajan has expressed desire to develop the debt market and to improve investor interest. The RBI also launched bond futures last year, successfully, after two previous attempts in 2003 and 2009, to what traders have termed as flawed designs.