TOKYO -- With India's banks saddled with bad loans, the country's central bank is urging foreign investors to snap up corporate bonds to prop up growth in the slowing economy.
Viral Acharya, deputy governor of the Reserve Bank of India, said Monday that last week's interest rate cut will be transmitted immediately through bond markets, while it will take longer to filter through banks to the real economy.
"The transmission of monetary policy is faster through the bond markets," Acharya said at a symposium hosted by the Institute of Indian Economic Studies in Tokyo. "It may take two quarters or three quarters before the policy actions of the central bank are transmitted to the households and the companies."
Acharya was speaking at the event supported by Nikkei, following a two-day meeting of the Group of 20 finance ministers and central bank governors in Fukuoka, Japan.
The RBI cut its key lending rate on Thursday for the third meeting in a row, in the latest attempt by an Asian central bank to contain the fallout from the U.S.-China trade war. The rate now stands at 5.75%, the lowest in nine years.
India saw growth decelerate sharply to 5.8% in the January-March period from 6.6% in the previous quarter. The slowdown highlights the economic challenges facing Prime Minister Narendra Modi as he embarks on his second five-year term after a resounding election win.
Private sector economists are urging Modi to use his party's expanded political mandate to push through bold economic reforms.
Revamping the financial industry, dominated by large state-owned banks, is seen by many analysts as a top priority for Modi's second term. Large banks have been hobbled by a relatively high level of nonperforming loans and have become cautious about lending, starving the private sector of much needed liquidity.
The situation has been exacerbated by a series of defaults last year by Infrastructure Leasing and Financial Services, India's largest project finance company. The crisis forced India's government to take control of IL&FS -- Japan's Orix is one of its top shareholders -- to avert wider contagion.
Acharya said that India has been taking steps to provide better protection for investors.
Among them is a new bankruptcy code, passed 2016, which aims to resolve nonperforming loans on banks' balance sheets. The RBI is working to make disclosure standards more transparent and is cooperating with rating agencies to ensure that defaults on bank loans and bonds are announced in a more timely manner.
Another initiative is the creation of a market for distressed bank loans and a housing securitization market through a greater standardization of loan contracts.
"The hope is that as [reform] takes hold, it will also lead to issuance and trading in lower rated corporate [bonds]," Acharya said.
India is also opening up its debt market to foreign investors, raising the limit on foreign bond ownership to $45 billion dollars.
"There are many Japanese institutions that are already investing in India, and India is looking forward to more such investment by foreign portfolio investors," Acharya said.