Archive for November 7th, 2007

Developments in India’s Debt Markets

November 7, 2007

Dr. Reddy has given a very useful speechon the developments in India’s debt market. The speech is useful on 2 fronts, first it gives a neat snapshot on the way government securities markets have developed and two, it explains the importance of sequencing of reforms in the G-sec markets.

1)  First the reforms were aimed at creating an enabling policy environment. This included

(i) the elimination of automatic monetisation; (ii) transition to market-related interest rates and (iii) reduction in SLR requirement to the then statutory minimum level of 25 per cent.

2) The second phase of reforms directed towards institutional development to enhance market activity, settlement and safety.

These reforms included (i) establishment of a Delivery versus Payment system, to reduce settlement risk; (ii) institution of the system of Primary Dealers (PDs), and (iii) formation of market bodies such as Fixed Income Money Market and Derivatives Association of India (FIMMDA) and Primary Dealers Association of India (PDAI).

….In order to meet the perse funding and hedging needs of participants, various types of instruments such as zero coupon bonds, capital indexed bonds, floating rate bonds and bonds with call and put options, were introduced. Floating Rate Bonds (FRBs) introduced during this phase did not evoke much response. Capital Indexed bonds (CIB) were first issued in 1997 but there were no further issuances mainly due to the lack of an enthusiastic response from the market participants, both in primary and secondary markets. Hence, plain vanilla bonds continue to be predominant in the issuances of government securities.

3) The third phase of reforms in the G-Sec market is aimed at enhancing liquidity and efficiency. This includes:

Some of the important initiatives that were taken during this phase are: (a) introduction of repo/ reverse repo operations in government securities to facilitate participants to manage short-term liquidity mismatches; (b) operationalisation of the Negotiated Dealing System (NDS), an automated electronic trading platform; (c) establishment of the Clearing Corporation of India Limited (CCIL) for providing an efficient and guaranteed settlement platform; (d) introduction of trading of G-secs in stock exchanges; (e) introduction of OTC and exchange-traded derivatives to facilitate hedging of interest rate risk; (f) introduction of Real Time Gross Settlement System (RTGS) which addresses settlement risk and facilitates liquidity management; (g) adoption of a modified Delivery-versus-Payment mode of settlement which provides for net settlement of both funds and securities legs; and (h) announcement of an indicative auction calendar for Treasury Bills and dated securities.

4) Attempts are being made to broadbase the market by allowing more investors to participate in the markets.

It sounds quite logical that way. First making it viable by creating an environment, then creating institutions and then enhancing liquidity in the markets.

Reddy discusses corporate bond market as well. It is quite clear from the speech that reforms have not been sequenced properly in the corp bond market. Reforms jumped to institutional development (by creating NSE) and skipped creating  a viable policy environment for corp bonds market. With basic issues like stamp duties etc not still addressed it is easy to see why corporate bond market has failed to pick up in India. The problem is still not addressed and we have numerous confusions regarding developments in the market.

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Assorted Links

November 7, 2007

1. WSJ Blog points out that Reserve Bank of Australia raises the benchmark rates by 25 bps to 6.75% on account of higher inflation. It points to ML advice on emerging markets. There is also some praise for ECB on the way it handled crisis.

2. James Hamilton explains that despite the oil price rise what matters more is downturn in housing and finance markets. I keep wondering how do Hamilton and Chinn keep coming up with such useful analysis. Excellent work.

3. In ET Malini Goyal has written an excellent piece on India’s employment problem. She says first rural people really struggle hard (travel about 50 kms one way for education, high costs, low incomes) to get a city job but despite all that find it tough to adjust to urban lifestyles (she points out a rural person quit his job as he couldn’t adjust to AC!) . With low communication skills, getting a good job is mighty tough. Excellent article. It is a  pity that the story features in Career section and would be hardly read. Why can’t newspapers put such stories on some more important sections and increase awareness about bigger problems in India than rise and fall of sensex.


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