UNDERDEVELOPED BOND MARKET
The Indian financial system is not well developed and diversified. One major missing element is an active, liquid, and large debt market. In terms of outstanding issued amount, Indian debt market ranks as the third largest in Asia, next only to that of Japan and South Korea.
Further, in terms of the primary issues of debt instruments, Indian market is quite large. The government continues to be a large borrower unlike South Korea where the private sector is the main borrower. If we compare the size of the Indian GDP with the outstanding size of the debt flotation, Indian debt market is not very much underdeveloped.
The gross domestic savings rate in the Indian economy is reasonably satisfactory at around 23%. According to RBI’s annual studies on savings, about 78% of the aggregate financial savings of the ho usehold sector were invested in fixed income assets.
The average Indian household has great appetite for debt instruments provided they are packaged properly. The main financial instruments popular with the households are bank deposits, provident funds, insurance, income-oriented mutual funds, and postal savings schemes.
However, the share of fixed income instruments that could be traded in the secondary markets is negligible. The main reason for this is the absence of an active secondary market in debt instruments. Investors are not willing to invest in tradable instruments as they lack required liquidity.
It is thus a typical case of “chicken and egg problem”. Since there are not enough number of issues and the floating stock in the secondary market is very small there is hardly any trading in them. Currently almost 98% of the secondary market transactions in debt instruments relate to government securities, treasury bills and bonds of public sector companies.
The quality of secondary market debt trading is very poor if we compare it with the quality of the secondary market in equities. Debt markets lack the required transparency, liquidity, and depth. With reference to the usual standards or yardsticks of market efficiency the Indian debt markets would not score more than 30% of the marks that the Indian equity markets would score.
The US has one of the most active secondary markets in both government and corporate bonds. The trading volume in the US debt market is said to be on an average ten times the size of the equity trading. In India the average daily trading in debt during the last year was about one tenth of the average daily trading in equities. These comparisons bring out the underdeveloped nature of the Indian debt markets.
The secondary debt market suffers from several infirmities. It is highly non-transparent compared to the equity market. It is highly fragmented since the ownership titles of government securities are fragmented in14 offices of the RBI, which acts as a depository for the governme nt debt including the treasury bills.
A seller from New Delhi cannot trade in Mumbai market since security held in RBI office in New Delhi cannot be easily transferred to Mumbai office of RBI and vice-versa. Since the current small order book stands fragmented city-wise the price discovery process does not throw up the best possible prices
The Indian financial system is not well developed and diversified. One major missing element is an active, liquid, and large debt market. In terms of outstanding issued amount, Indian debt market ranks as the third largest in Asia, next only to that of Japan and South Korea.
Further, in terms of the primary issues of debt instruments, Indian market is quite large. The government continues to be a large borrower unlike South Korea where the private sector is the main borrower. If we compare the size of the Indian GDP with the outstanding size of the debt flotation, Indian debt market is not very much underdeveloped.
The gross domestic savings rate in the Indian economy is reasonably satisfactory at around 23%. According to RBI’s annual studies on savings, about 78% of the aggregate financial savings of the ho usehold sector were invested in fixed income assets.
The average Indian household has great appetite for debt instruments provided they are packaged properly. The main financial instruments popular with the households are bank deposits, provident funds, insurance, income-oriented mutual funds, and postal savings schemes.
However, the share of fixed income instruments that could be traded in the secondary markets is negligible. The main reason for this is the absence of an active secondary market in debt instruments. Investors are not willing to invest in tradable instruments as they lack required liquidity.
It is thus a typical case of “chicken and egg problem”. Since there are not enough number of issues and the floating stock in the secondary market is very small there is hardly any trading in them. Currently almost 98% of the secondary market transactions in debt instruments relate to government securities, treasury bills and bonds of public sector companies.
The quality of secondary market debt trading is very poor if we compare it with the quality of the secondary market in equities. Debt markets lack the required transparency, liquidity, and depth. With reference to the usual standards or yardsticks of market efficiency the Indian debt markets would not score more than 30% of the marks that the Indian equity markets would score.
The US has one of the most active secondary markets in both government and corporate bonds. The trading volume in the US debt market is said to be on an average ten times the size of the equity trading. In India the average daily trading in debt during the last year was about one tenth of the average daily trading in equities. These comparisons bring out the underdeveloped nature of the Indian debt markets.
The secondary debt market suffers from several infirmities. It is highly non-transparent compared to the equity market. It is highly fragmented since the ownership titles of government securities are fragmented in14 offices of the RBI, which acts as a depository for the governme nt debt including the treasury bills.
A seller from New Delhi cannot trade in Mumbai market since security held in RBI office in New Delhi cannot be easily transferred to Mumbai office of RBI and vice-versa. Since the current small order book stands fragmented city-wise the price discovery process does not throw up the best possible prices