## Wednesday, October 24, 2007

### The moribund government bond market

India is a land of extremes. Right alongside the remarkable success of a reforms effort on the equity market, we got a remarkable failure of a reforms effort on the bond market. Manish Sabharwal & Digant Bhansali have a fascinating article in Economic Times on the slow death of the government bond market in India. This table is in the article:

Feature 03-0404-0505-0606-0707-08
Number of gilts traded > 4 times/week 27 14 9 6
Number of gilts that addup to 90% of volume 26 33 15 11 11
Volume of top traded security (%) 11 23 18 33 36
Share of NDS in volume (%) 0 0 53 79 84
Equity turnover (billion USD) 933 1051 1802 2564
Gilts turnover (billion USD) 365 216 164 221

It's astonishing to notice that from 2003-04 to 2006-07, a time of remarkable GDP growth in India coupled with a massive scale of government bond issuance owing to large deficits, government bond turnover dropped from $365 billion to$221 billion. Over this same period, equities turnover went up from $933 billion to$2564 billion.

The state of the market is visible in the turnover of the biggest single bond - this went up from 11% of the market in 2003-04 to 36% in 2007-08.

This is the period over which RBI implemented the Negotiated Dealing System, their vision for how the bond market should be transformed.