Out of debt row: Bond market gets a lifeline

The credit policy holds out a lot of promise for the beleaguered Indian debt market with the RBI governor announcing a wide range of proposals and policy changes to liven up the segment. The debt market has been in the doldrums since the past couple of quarters on the back of hardening interest rates and falling bond prices. Turnover in the bond market was down sharply from Rs 13,000 crore in '03 to as little as 1,300 crore in the current quarter. The RBI has announced a host of proposals aimed at improving liquidity in the market. Most prominent among these is the plan to consolidate debt securities with the intention of providing better liquidity and price discovery in the market. Currently, liquidity in the market is restricted to a few securities. There are huge amounts of illiquid G-secs in which there is negligible or no trading. What this consolidation seeks to do is to combine different securities into a particular maturity profile, thus resulting in few securities with large issue sizes, which will be traded more actively. For example, if there are 17 different securities available for trading in the market that mature in the year 2017, these could be consolidated into one lot of securities, which mature in 2017. This could be mainly done by re-issuances where the RBI could re-issue liquid securities from its book. The other option would be for the government to buyback illiquid securities and in turn issue liquid securities. This is called active consolidation. Said Nitin Jain of ICICI Securities, This could also encourage an active STRIPS market in G-secs. STRIPS is the process of separately trading the coupon and principal portion of a security. This is because with consolidation, issue sizes will be large enough allowing the coupon component to be floated and traded separately. This could create an issue of huge cash outflows for the government on account of coupon payments, Mr Jain said. The policy seeks to provide a much-needed lifeline to primary dealers (PDs). Proposals are aimed at providing exclusivity to PDs in primary issuances through the introduction of book-building for G-sec issues. This will signal a move to the international model where all primary issuances of G-secs are done through PDs. Introduction of book-building will necessitate that every player subscribing to an issue goes through the PD, who will run the book for an issue of G-secs. This will enable the PD to make an effective bid as he will be aware of the quantity and price at which the demand for the issue is coming in. This, and the fact that starting April '06 the RBI intends to no longer participate in the issuances of G-secs, will provide exclusivity and alternative revenue streams for PDs. The market could also see PDs merging with their parent banks. This is because a majority of the PDs are sponsored by banks. If the proposal to include the PD business within a bank's business structure comes through, it could bring more banks into the market. The regulator is also looking at allowing PDs to short-sell, albeit on a limited basis. This is an important measure as it provides the player to take a two-way position in the market. As of today, PDs are allowed to sell only after they have bought the security, which allows them to trade only unidirectionally. This could give them the opportunity to make more active trade calls. The proposal to allow sale transactions even among the CSGL (constituent secondary general ledger) account holders will provide the market with increased breadth. Earlier, market participants could sell G-secs on the day of allotment only among banks or to PDs. This was because banks and PDs hold G-secs in a SGL (secondary general ledger) account with the RBI. This provision has been widened to include others who hold G-secs in CSGL accounts with banks. This increases the number of players in these transactions, bringing in mutual funds, provident fund trusts and corporates and HNIs who directly invest and hold G-secs.

Out of debt row: Bond market gets a lifeline

The credit policy holds out a lot of promise for the beleaguered Indian debt market with the RBI governor announcing a wide range of proposals and policy changes to liven up the segment.

More from our Partners

Popular Categories

Hot on Web

In Case you missed it

Top Searched Companies

Latest News

Download ET APP

Follow us on

become a member