India Allows Banks to Invest in Infrastructure Bonds of Rivals

India’s central bank allowed lenders to invest in long-term infrastructure bonds issued by competitors as part of efforts to deepen the market for debt securities.

Investment in these notes won’t be treated as assets with the banking system while computing the deposit base, the Reserve Bank of India said today. The regulator also issued rules that capped such holdings.

“This move will help develop a yield curve for senior bonds by banks,” said N.S. Venkatesh, chief financial officer at IDBI Bank Ltd. “I expect banks with a large pool of assets in infrastructure to tap the market as such debt will now have a much wider audience.”

The central bank, which left the benchmark repurchase rate unchanged at 7.5 percent today, said it will issue detailed guidelines on banks’ long-term bonds shortly. Indian banks sold about 214 billion rupees ($3.4 billion) of infrastructure bonds in the year ended March 31 as the RBI eased rules, exempting some issuances from mandatory reserve requirements.

Finance Minister Arun Jaitley in the Feb. 28 budget revived tax-free bond sales for this fiscal year in rail, road and irrigation as he seeks to spur infrastructure spending.

In July, the RBI had exempted bank bonds maturing in seven or more years from reserve requirements to boost funding for infrastructure and affordable housing. With today’s announcement, it eased restrictions on cross-holding of debt among banks imposed earlier to shield against default risks.

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