Mumbai, Aug 6 (PTI) With a view to expanding the bond market, the RBI on Thursday permitted banks to invest in debt instruments through mutual funds or exchange traded funds without allocating additional charges.

As per RBI's extant Basel III guidelines, if a bank holds a debt instrument directly, it would have to allocate lower capital as compared to holding the same debt instrument through a mutual fund (MF)/exchange traded fund (ETF).

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"It has been decided to harmonise the differential treatment existing currently. This will result in substantial capital savings for banks and is expected to give a boost to the corporate bond market," RBI Governor Shaktikanta Das said while unveiling the bi-monthly monetary policy review.

Hence, it has been decided that the general market risk charge of 9 per cent will apply on both direct holdings, as well as through mutual funds/ETFs.

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Experts believe RBI's decision to harmonise risk weights will boost liquidity in the bond markets in the long term.

"This will make the asset class more attractive for banks, and in the long term only aid liquidity and development of the bond market," said Radhika Gupta, MD and CEO of Edelweiss AMC.

The move to bring parity in capital charge should mitigate the need to redeem frequently, said R Sivakumar, head - fixed income at Axis AMC.

This is a significant move to ensure liquidity is not stressed for mutual funds, he added.

(The above story is verified and authored by Press Trust of India (PTI) staff. PTI, India’s premier news agency, employs more than 400 journalists and 500 stringers to cover almost every district and small town in India.. The views appearing in the above post do not reflect the opinions of LatestLY)