Indian Bond Markets

Assessment and Prospects

H R Khan
Reserve Bank of India
FIMMDA Network Event, September 17,
2010
 Opening Thoughts
• Importance of bond markets
• Government Bond Market
– Provides a risk-free yield curve
– Liquid, deep, and broad-based market necessary to
facilitate optimal government borrowing
• Corporate Bond market
– Providing corporate sector a financing avenue
complementary to bank finance
– Promote financial stability
–
• Two decades of market reform
– Covered a lot of ground but a lot still to be done
• Times have never been more interesting
• Global Crisis is an opportunity to look back and reflect on
the road travelled
• Look at the issues in a SWOT framework
•
CORPORATE BOND
MARKET (CBM)
 CBM- Strengths
– Jurisdictional clarity
– Increased regulatory focus
– Dematerialized holding
– DvP settlement of OTC trades
– Reporting and dissemination of OTC
data
– Availability of repo facility
– Secondary market activity on the rise
•

–
Source : SEBI
 CBM-weaknesses
– Historically a bank based financial
system
– Too few public issuances
• Preference for bank loans, ECBs or
Private Placements
– Illiquidity
• Predominantly buy and hold investors
- cause
• Lack of exit options dissuades
potential investors- effect
•

–
 CBM-Opportunities and
Threats
• Opportunities
– Enormous scope for expansion of this
market
• Investment demands of a growing
economy particularly huge infrastructure
investments
• Growing pension sector
– Tapping latent investors with innovative
products
– IFRS norms- symmetrical treatment to
loans and bonds
• Threats
– Shallow markets- risk of volatility,
Bond markets- Way
forward
 Way forward: Corporate
Bonds
• Higher activity in corp bonds
– To meet the funding gap for
corporates and infra sector
• Repo in corporate bonds
– Review of haircuts and settlement
cycle
• Introduction of CDS
– Expected to encourage participation
• Widening of the menu of IRFs
– To enable hedging IR risk
Parting thoughts
 Role of FIMMDA in the
changing times
• More proactive and coordinating role
• Higher responsibilities
– Reporting platforms for corporate
bonds (outright and repo) and CPs,
CDs
– Introduction of CDS
• Feedback on policies
• Facilitation of active participation by
members
• FIMMDA as an SRO?
 Role of market participants
• Market liquidity is a result of active
participation from members
– Look within
• Regulator only facilitates
• Market development is a cycle of
conception introduction, feedback
and review
– Participants’ active role is
indispensible
• New products need more nurturing in
the early stages before they