Rating agency Crisil today said introduction of credit default swaps (CDS) by the Reserve Bank augurs well for development of India's bond markets.
CDS will lead to a gradual deepening of the corporate bond market as CDS can enhance the bond market investors' appetite for lower rated issuers, beyond their traditional favourites in the high-safety category, Crisil said in a statement.
CDS are instruments that provide buyers with protection against credit losses, just as insurance products do.
CDS provides credit protection to corporate bond buyers, as the sellers of the swaps guarantee the credit-worthiness of the product. Thus, the risk of default is transferred from the holder of the fixed income security to the seller of the swap.
As investors can buy CDS protection against potential credit losses, they will be more open to invest in instruments rated lower than 'AA' category, which is critical for the growth of bond markets. Increased use of CDS, over the medium term, has potential to impart additional liquidity to the bond markets, which have so far been predominantly illiquid, it said.
It will help lower rated borrowers diversify their funding sources by accessing the bond markets. CDS also holds promise of providing a thrust to the much-needed infrastructure financing.
