Mar 4, 2002|
Debt market: Time to evolve
Debt markets over the last one-year have witnessed healthy volumes. The depth of the markets widened with the aggressive entry of debt mutual funds and also heavy investments by banks in government securities. Retail participation in the primary market was also encouraged by allocating them up to 5% of issue on a non-competitive basis.
Significant steps have been taken to develop the debt markets. This includes the recent launch of Clearing Corporation of India (CCIL) and negotiated dealing systems (NDS). CCIL and NDS are expected to address the need for efficient securities settlement system covering money, government securities and forex markets. NDS will facilitate electronic bidding in auctions and secondary market transactions in government securities. It will also help in dissemination of information on trades on a real time basis, which was hitherto not available. These systems are also expected to facilitate extension of repo market to non-Government securities and enlargement of market participants.
Fixed rate instruments dominated the markets over the past few years. The introduction of floating rate bonds on uniform auction basis has widened the scope for a flexible interest rate regime in tune with the trends prevailing in the international markets. The Central government issued two floating rate bonds (FRB) on the basis of uniform price auction in the current year.
In the current budget, the government has proposed to link the interest rates of administered instruments (NSC, PPF) to yields on government securities on an annual basis. The 10-year benchmark yield for G-sec is currently near 7%, while interest rate on small saving schemes (after a 50 basis points cut in rates) is 9%. Benchmarking small savings rates to G-Sec yield would remove the structural rigidities in interest rate administration for the economy as a whole. This will also open the way for a flexible interest rate regime and will also help the government in reducing its debt burden.
The RBI has also prepared a road map for developing Separate Trading of Registered Interest and Principal of Securities (STRIPS). This would allow trading principal of the instrument separately, stripping out the coupon (interest payment). These instruments are traded actively in the global markets.
Volumes in the gilt markets to a large extent are dependent on the government’s borrowing program. Just to put things in perspective consider this. The gross borrowing of the government for FY02 is expected to be at Rs 1,189 bn as against Rs 1,177 bn in FY01. Till December 28, 2001, Rs 1,160 bn or 98% of the budgeted amount was already borrowed. 85% was borrowed through dated securities and the remaining 15% through 364 days Treasury bills. Fiscal deficit of the country is widening (estimated to be 5.3% of GDP) and the government is expected to again borrow a similar amount in FY03 to fund this deficit.
On the one hand, it would offer liquidity to the markets. This could keep interest rates under pressure, as it would be a difficult task for the government to raise funds at rates lower than the current 7% G-Sec yield. Once the credit growth picks up, banks are unlikely to make higher investments in G-Secs (at relatively lower yields as their spread on industrial credit is much higher). Retail participation in the debt markets is however expected to increase once the investors are conversant with these new systems. Also, liquidity in G-Secs is much higher than that of small saving schemes. Its worth to note that interest rates on small saving schemes in the coming years will be linked to G-Sec yields. Consequently, investors would not be able to earn higher returns by locking their funds in small saving schemes for long term. This could encourage retail participation in the G-Sec market and widen market volumes.
More Views on News
Aug 10, 2017
IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.
Aug 10, 2017
Asset quality will be the key thing to watch out for going forward.
Jul 31, 2017
Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.
Jul 6, 2017
Does the stock score on the value versus price equation?
Jun 27, 2017
Should one subscribe to the IPO of AU Small Finance Bank Ltd?
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407