Government deficit spending exerts negative impact on corporate bond market: RBI study The financing of government deficit spending as reflected in the domestic credit extended by the banking sector has exerted a negative effect on its development, reveals a RBI study on corporate bond market in India. The study notes that although the reform process in the corporate bond market has been encouraging, the implementation of reforms has proceeded slowly. Companies continue to finance their investments through private placements and bank loans rather than through public issues and corporate bonds despite policies implemented to encourage retail and institutional participation, to streamline the issuance process and to create new and missing markets. One of the reasons for the bank finance being preferred by corporations is due to the prevalence of cash credit system in banks in which the cash management of the corporations is actually done by the banks. This indicates that the corporate bond market still has a long way to go before becoming a viable source for companies to finance their investments, pointed the study. The analysis indicates that among the various factors that have influenced development of corporate bond market, the growth of the Government bond market has had positive influence on the development of the corporate bond market in India as in the case of other countries such as South Korea. Other factors such as the size of the economy, openness, size of the stock market and institutional factors like corruption have had little or no impact on the development of the corporate bond market. There is scope for further improvements in certain areas, such as, rationalising the stamp duty structure across the country and fixing stamp duties based on tenor and issuance value to encourage public offerings of corporate debt, highlighted the report.
Posted on: Wed, 05 Mar 2014 10:11:19 +0000
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