RBI to form panel to suggest ways to boost bond market

MUMBAI: In order to deepen the bond market and iron out liquidity issues, the Reserve Bank of India will set up a working group that will have representatives from various stakeholder entities like banks, mutual funds, corporates, primary dealers and self regulatory bodies like FIMMDA (Fixed Income Money Markets and Derivatives Association of India) or FEDAI ( Foreign Exchange Derivative Association of India).

Among the 25-30 odd government securities, only about 5-6 securities are liquid and have trading value, which has been a concern for the bond market regulator.

"We don't have liquidity on major points of the yield curve," said HR Khan, deputy governor, RBI, on the release of its second quarter policy review. He said that public sector banks do not participate actively in the derivatives market.

The RBI mentioned that guidelines on credit default swaps trading will become effective from November end, while the final guidelines on cash settled 2 year and 5 year interest rate futures will become effective from December end 2011. Dealers will be able to short sell government securities for a period of three months, only by December this year.

"There is skewness in the market. There is some amount of disconnect between the cash market and derivatives market and there are accounting issues too," Khan said. The yields on 10-year government bonds cooled to 8.73% after falling to the day's low of 8.67% as RBI signalled a pass in the rate hike cycle.