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India central bank seeks to boost trading in illiquid government debt

[MUMBAI] India's central bank said on Tuesday it was preparing to widen trading for less liquid government bonds and would let banks buy into infrastructure bonds, continuing efforts to develop the country's debt markets.

The debt market measures were announced as part of the Reserve Bank of India's policy review on Tuesday, when interest rates were kept on hold. They continue the central bank's practice under Governor Raghuram Rajan to announce frequent initiatives for markets.

The RBI said it would announce a plan that would promote"market making" in "semi-liquid" and "illiquid government securities" in the next three months.

India's central bank has been keen to promote more trading across debt maturities as it now only concentrates on around four to five bonds.

Traders said any measures would need to incentivise primary dealers and ensure they did not suffer losses, such as by having the central bank actively buy back illiquid debt.

"Market makers would need protection and tools though, including backstop liquidity when required," said Ananth Narayan, Regional Head of Financial Markets, South Asia, Standard Chartered Bank.

The RBI on Tuesday also said it would allow banks to buy infrastructure bonds under certain conditions, including how much of the debt lenders can hold. Purchased infrastructure bonds would also not be counted within the bank's reserve requirements with the central bank.

India introduced infrastructure bonds last year as a way to fund billions of dollars needed for mega-projects. But the market has struggled to take off after the RBI banned lenders from buying the bonds, seeking instead to attract institutional investors.

The central bank also announced a slew of other measures, including allowing companies to raise rupee debt offshore and encouraging banks to decide lending rates based on their marginal cost of funding.


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