23 Apr 2016

Indian Debt Market Path Ahead

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The Indian Bond markets have undergone a metamorphosis post the financial market reforms in 1990.

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Arjun Parthasarathy

The Indian Bond markets have undergone a metamorphosis post the financial market reforms in 1990.

 The products in the debt and derivatives segment  have grown in numbers and complexity. The sovereign yield curve has elongated up to 40 years. Primary market issuances have increased resulting in large benchmark issuances.

Secondary market volumes have risen considerably increasing the depth of the market. The bid-ask spread of on-the-run government securities continues to be low and so are impact costs.

Volumes in the Corporate Bonds segment has also risen but is still lower as compared to the global peers.

RBI is working towards deepening the Government bonds markets. They are trying to increase the access, liquidity , increase in instruments, infrastructure,intermediaries and innovations domestically.

They are also opening up access to foreign investors in a calibrated manner and via better communication of the debt management policy for clarity and clear articulation of policy. This reduces uncertainity in the minds of investors both global and domestic.

RBI in consultation with government have articulated medium term debt management strategy (MTDS) which provides requisite information, transparency & certainty and enables market participants (investors) to plan their strategy for investment in Government bonds market.

The MTDS will be in effect  for a period of three years and it will be reviewed annually and rolled over for the next three years. It has 3 objectives, reducing the cost of borrowings for the government over a period of time, risk mitigation and market development.

How MTDS was and will be effective

MTDS helps in managing the governments borrowings effectively keeping in mind the demand supply situations.

Pressure at short-end maturity bonds is reduced by undertaking switches or buybacks in order to reduce the concentration of redemptions and create space for further issuances.

During the past three fiscal years, switches amounting to about Rupees one trillion were undertaken by the Reserve Bank in consultation with the Government. The operations have eased gross borrowing numbers and enabled effective borrowings.

MTDS ensures stability of operation process. For eg ,The market participants were expressing concern about the potential elevated supply of government bonds due to the issuances by the state governments under Ujwal DISCOM Assurance Yojana (UDAY). The SDL yields surged in anticipation of its huge expected borrowings.

RBI acted in a calibrated manner planning issuances to banks that have DISCOM dues directly so that the supply will not enter the market. They also allowed the subscribing bank to categorise  these as ‘HTM’.

The bonds issued to pay dues to the central public sector undertakings were offered through private placements. The pressure on the yields moderated by modulating the issuance strategy to limit issuances of long tenors announcing the same in the borrowing calendar for first half of the fiscal 2016-17 .

This reduced imaginary stress in markets and UDAY bonds of about  Rs. 990 million were placed successfully.

Future initiatives

The difficulty in access to NDS-OM by non-institutional investor class hampers trading interest in G-Sec. Reserve Bank has initiated an upgradation of the NDS-OM platform with CCIl and depositories.

The new system is expected to have faster through-put, enhanced functionalities, rich user interface, internationally compatible message formats. It will give demat account holders direct access to NDS-OM.

This is expected to open up a large investor base, hitherto untapped, for investment in G-Sec. Even though G-Sec are globally institutional markets, this step is one of the most significant ones to facilitate retail investment in G-Sec.

Corporate Bonds

RBI acknowledged a need to introduce electronic trading dealing platforms for other financial instruments like corporate bonds, CPs, CDs and derivative products. RBI has proposed to prescribe a framework for authorization of electronic dealing platforms for financial instruments regulated by it.

Based on recommendations of a Working Group set up under the aegis of FSDC-SC, certain measures have been announced in the Union Budget for 2016-17 for development of the corporate bond market:

Development of a framework for an electronic platform for repo market in corporate bonds,Setting up of a dedicated fund to provide credit enhancement to infrastructure projects by the Life Insurance Corporation (LIC),Issue of guidelines by the Reserve Bank of India to encourage large borrowers to access a certain portion of their financing needs through market mechanism instead of the banks,Expansion of investment basket of foreign portfolio investors to include unlisted debt securities and pass through securities issued by securitisation SPVs,Development of a complete information repository for corporate bonds, covering both primary and secondary market segments,Introduction of electronic auction platform for developing an enabling eco system for the private placement market in corporate bonds by SEBI for primary debt offer

It is expected that the Indian debt markets will evolve into a efficient ecosystem connecting more varied investor classes alongside multiple platforms

Indian Debt Market Path Ahead – 2020 is written referring through one of the recent speeches by RBI authority.



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