Debt markets: Coming of age - Views on News from Equitymaster

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Debt markets: Coming of age

Mar 15, 2001

In the past few days while the equity markets crashed, debt markets witnessed a steady buying interest. However, compared to large volumes in the post budget week, liquidity in the debt markets declined to a certain extent recently. After remaining subdued during the period May November 00, the activity in the debt markets picked up with the expectation of southward movement of interest rates. The volumes in the markets started rising beginning from December. The debt markets got a further boost with the benefits provided by the budget, which were above expectations.

The prices of government securities rallied with a cut in interest rates. While the prices of GOI securities moved up by Rs 2-3, the 10-year yield fell to a historical low level. Subsequently, players started unwinding long positions and profit booking was witnessed across the board. Speculative positions, which were built up before the budget were squared off after the rate cut.

During this period, the liquidity in the markets remained easy as the first phase of CRR cut released Rs 20.5 bn into the banking system (this indicates high inflow of funds in the debt markets). However, in the short term the liquidity in the markets is likely to be capped by the year- end advance tax outflows. The slide in the equity markets impacted the forex rates and the fresh flow of funds into the debt markets. The debt oriented mutual funds opted to book profits as they had already built up higher positions before the budget in the expectation of an interest rate cut. On the demand side too, the government borrowings have completed almost 93% of its budgeted borrowings. This could drive the bond prices downward with profit booking at every level.

Nevertheless, the prospects for debt markets seems bright as volumes are increasing every day with comparatively less volatility than equity markets. For the year ended March 01, the turnover of the system is expected to jump by over 25% to Rs 5,000 bn. Currently only institutions, banks and corporates are large players in the markets. While the exposure of retail investor is significantly low due to lack of awareness. Since the returns provided by the government securities are relatively lucrative and safe, more investments is likely to come which in turn would further improve the liquidity in the markets.

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