RBI allows participants to use municipal bonds as collateral in overnight repo transactions

The Reserve Bank of India (RBI) has allowed money market participants to pledge municipal bonds for borrowing in the overnight market under repo operations (Repo), the regulator said on Tuesday.Unlisted companies holding government securities will also be considered eligible participants for repo transactions, the RBI said.

“Eligible participants include all unlisted companies having special securities issued by the Government of India and using only such special securities as collateral,” the RBI said in the guidelines published on its website.

On Tuesday, the RBI issued the master direction on Repurchase Transactions (Repo), in which it took measures to deepen the bond market.

The inclusion of municipal bonds is expected to increase the liquidity and acceptability of local government debt in the market, bond traders said. Municipal bonds have a minimum haircut of 2%. Municipal corporations have issued bonds worth Rs 575 crore this financial year. As per SEBI data, the total outstanding municipal debt stands at Rs 3,358 crore.

The other eligible securities as collateral include government bonds, listed corporate bonds, commercial papers (CPs) and certificates of deposit (CDs).

Repurchase agreement is a tool for short-term lending in the government bond markets. A dealer sells securities and agrees to buy them back shortly afterwards at a higher price. Other government bonds are used as collateral in these transactions.