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Debt market sees development push in policy

Beverly Mathews in Bombay

India's fledgling debt market is hoping the central bank's annual Monetary and Credit Policy statement on Thursday will contain measures to make bond trading more transparent, improve volumes and liquidity.

On the wish-list of debt market traders are a move towards a screen-based electronic trading system and real time settlement, restructuring of the call money market and access to additional liquidity from the central bank.

India's secondary market for debt has made considerable progress with volumes rising five-fold over the last five years -- but is still far from being vibrant or liquid.

Most trades are limited to government securities, with daily volumes only around Rs 20-40 billion compared with outstanding debt of Rs 4.58 trillion.

Automated dealing

Debt trading in India is largely done over the telephone.

The National Stock Exchange has an electronic trading system but banks, which are among

the largest players, cannot be members of a stock exchange. Even on the NSE, deals are reported on screen only after they are done on the phone.

In its 2001-02 budget, the government proposed a negotiated dealing system and real time settlement which market participants feel will boost trade volumes, particularly in the languishing corporate debt market.

Following the budget proposal, and recent moves by large banks to set up a securities clearing corporation, traders believe the credit policy could lay out a road map for the move towards electronic dealing.

The country's largest commercial bank, the State Bank of India, is expected to help set up the clearing company, which some traders expect to be in place as early as June.

"The date to set up the clearing corporation is likely to be finalised in the policy," the treasury head of a leading private sector bank said.

"A real time system will force the dematerialisation of bonds and will facilitate more liquidity and higher volumes in the corporate debt market," he said.

The lack of dematerialisation -- transferring paper records to electronic storage -- was seen as one of the main reasons for the poor volumes in the corporate debt market.

Another announcement expected is a move towards restructuring the call and notice money market into a purely interbank market.

Currently development financial institutions, insurance firms and mutual funds are allowed to lend in this market. Companies are also allowed to lend through primary dealers.

With a purely interbank market, players expect a risk-free short-term yield curve to develop, which should then facilitate better pricing in other parts of the market.

"The central bank is expected to suggest a road map towards its implementation," said Ashish Parthasarthy, head of trading at HDFC Bank.

Separate repo

"We have been asking for a separate liquidity adjustment facility (repo) to meet daily needs," said R C Royappa, managing director and chief executive officer at SBI Gilts Ltd and head of the Primary Dealers Association of India.

These dealers can currently get Tier-1 refinance from the central bank at the bank rate, currently pegged at 7 per cent.

They can borrow more through repo auctions with the central bank, but funds available through this mechanism are not assured because their bids may not be successful.

The dealers want a repo facility with predetermined limits, which will allow them to borrow funds from the central bank at rates linked to the daily repo rate.

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