## 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.

#### 3 comments:

1. Indian bond market will be more active if there are many products on offering. We need a range of products. RBI can repackage exiting bonds in tranches products, STRIPS and inflation liked products etc. We need to cater different needs of investors.

2. ajay shah,
having been in the debt market for more than 10 years state of debt market is not surprising.debt market always suffered step motherly treatment - either in the hands of the regulator (stamp duty, transaction fees, turnover charges problems etc) or the investor (with equities roaring who is interested in a 8% return .NSE which started off with membership of the debt market did little to promote the the debt brokers - In fact one of the key person involved in promoting the exchange was later on crusading as to how evil the broking method was and as to why the institutions should shift to screen based trading (different hat - different tune).So called well informed pink dailies celebrate the index reaching 20000 but dont devote enough pulp space to highlight the sad state of debt market. Any market without a robust fixed income market is an incomplete market due to lack of hedging opportunities -Moreover the powers that be also seem to have an indifferent attitude towards debt papers and its regulation per se

3. How does this post not blatantly contradict the post of October 7th regarding Exchanges v OTC? The ICAP people are saying OTC works for debt, so what happened to our market then? And why are you quoting someone who's arguing against your position in a manner that seeks to buttress it (the ICAP folks)?

What is our CCIL-arrangement, really? Let's see, central counterparty, but OTC...that's right, kind of a hybrid. This hybridity is increasingly the norm. But comparing things to the success of the equity market is such a red herring: you had the raw materials in terms of a diversity of players there, you just had to get the structure right. In debt, you killed off the players for control. Structure cuts both ways, and is far from sufficient.

All this to say that market structures are complicated and tend to follow from the instrument traded, but surely there's a political economy to all of this? So ante up Shah: if the question of structure is more complicated than you let on, why do you keep pushing one over the other? The normal brokers and "interdealer brokers" make no bones about their positions (which seem to contradict yours); are you arguing from 'science'? Why then does global evidence (hybridity) fly in the face of your argument? Cards on the table man...

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