Indian Government Bond Market – Some basics and their trading activity…

Michael Fleming, Samita Sareen, and Seema Saggar of NY Fed have a rare paper on Indian bond market.

Indian bond market developments are ignored significantly by the media. The bias is hugely towards equity markets and bond market developments are rarely covrered.

This bit is ironical as on one side we track central banks interest rate movements with huge obsession. But on the other hand we do not cover the bond market which reacts immediately on any such news. Based on our equity market coverage, we should be actually getting more news about the capital market regulator – SEBI- but hardly get anything much. So there are these puzzles in both sides.

Anyways, coming to the paper. They say trading remains centred on benchmark issues:

We study how the Indian government bond market functions, how it has changed over time, and what factors help explain some of its features. Looking at the primary market, we describe how underwriting obligations are allocated to primary dealers via auction and identify several significant determinants of the underwriting commission cutoff rate, including the launch of the Negotiated Dealing System-Order Matching System (NDS-OM) electronic trading platform. Turning to the secondary market, we explore the importance of benchmark bonds, the launch of NDS-OM, the growth in trading activity, and the migration of activity from the over-the-counter (OTC) market to NDS-OM. We find that benchmark bonds, larger issues, and recently issued bonds tend to trade more actively, but that the launch of NDS-OM is associated with a reduced likelihood of a bond trading but greater trading volume conditional on trading. Benchmark bonds, larger issues, and recently issued bonds are associated with a greater share of NDS-OM trading volume (as opposed to OTC trading volume), suggesting that the NDS-OM platform is especially attractive for trading bonds with benchmark attributes.

Nice review especially on how the whole market works..

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