RBI Issued Guidelines to Develop Indian Corporate Bond Market

The Reserve Bank of India (RBI) in draft guidelines released on 23 February 2011 the RBI also limited foreign institution investors’ (FIIs) role only to hedging the credit risk and also suggested that FIIs be included as users. The RBI aims to develop the Indian corporatl investors’ (FIIs) role only te bond market and is in favour of allowing foreign funds in the market when credit default swaps (CDS) for corporate bonds are launched. CDS allows creditors to insure against the possibility of default by a borrower.
The entry of FIIs into CDS will enable more money to be parked in the Indian bond market. At present, FIIs in government securities and corporate bonds is $30 billion (around R 135000 crore).

As per the swap contract the protection buyer who has exposure to a bond or loan makes regular premium payments to the protection seller and in return the seller assumes the risk in case of a default.

The RBI had earlier issued a draft report on CDS for corporate bonds in August 2010. The latest draft issued on 23 February 2011 will be open for feedback up to 8 March 2011 and this is the fourth time that the RBI has come out with a draft report on the same.