The repo in corporate bonds is slowly picking up pace, shows data

Rates offered at par or lower than RBI's repo rate

The repo in corporate bonds is slowly picking up pace, though the volume is nowhere near what it should be to consider it a serious marketplace.  

Surprisingly, the rates offered in the market are at par or lower than the repo rate offered by the Reserve Bank of India (RBI) through its liquidity adjustment facility (LAF).

Generally, the repo is conducted with the highest-rated papers of private firms and public sector undertakings. RBI regulation prescribes AA as the minimum rating for a repo. But, it is mostly AAA-rated papers that have some liquidity in the secondary market, and these papers are used for repo.

Among private firms, HDFC’s papers are widely accepted for repo. Government companies and financial institutions such as PFC, Rural Electrification Corp, SIDBI, and NHB are some other papers used for repo. Since the Edelweiss-floated Bharat Bond ETF is made up of high-quality AAA-rated papers that is used for corporate repo, too.  

Repo refers to the ability to mortgage securities in lieu of overnight or ultra-short-term liquidity. Banks borrow from RBI at a repo rate of 4 per cent, but park their excess cash and take government securities at the reverse repo rate of 3.35 per cent. The liquidity parked with RBI by banks on Monday was over Rs 5.5 trillion, net of repo lending.   The repo in corporate bonds is nowhere close to that. On Tuesday, only three papers were used for repo, those issued by Torrent , PFC, and BSNL. The total trade was just Rs 174 crore.

Corporate repo has totaled to just Rs 12,068 crore thus far in March. However, experts say what is more important is the steady interest in the corporate bond repo, and volume will pick up once it gets widely issued in public space, against the current practice of private placement.  

Interestingly, the rates offered in the market are as low as 3.35 per cent, which is the reverse repo rate. That means, technically, money can be availed through this route at a rate that is cheaper than RBI’s 4 per cent. However, the corporate repo rates will certainly pick up if the system is short of liquidity, which is not the case now. Instead, the system is flush with liquidity and only those in need of immediate liquidity are accessing the corporate repo market, say bond market participants.  

“The corporate bond market liquidity is nowhere near the G-Sec liquidity, and so, the repo market itself will have no liquidity. Whether it will pick up or not depends entirely on whether market depth increases,” an expert said. 

RBI first allowed repo in the corporate debt market in February 2015, and in August 2017, it allowed exchanges to get involved as clearing agencies in a tri-party repo. Two decades ago, repo in corporate bonds was considered illegal and led to high-profile scams in the Indian financial market.