What improvements are required to make the Indian Debt Market stronger?
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While India boasts a world-class equity market and increasingly important bank assets, its bond
market has not kept up. The government bond market remains illiquid. The corporate bond
market, in addition, remains restrictive to participants and largely arbitrage-driven. Securitization,
which once had the jump on other Asian markets, has failed to take off.
To meet the needs of its firms and investors, the bond market must therefore evolve. This will
mean creating new market sectors such as exchange-traded interest rate and foreign exchange
derivatives contracts. It will mean relaxing exchange restrictions, easing investment mandates
on contractual savings institutions, reforming the stamp duty tax, and revamping disclosure
requirements for corporate public offers. This paper reviews the development and outlook of the
Indian bond market. It looks at the market participants—including life insurance, pension funds,
mutual funds and foreign investors—and it discusses the importance to development of learning
from the innovations and experiences of others.
Keywords: India, emerging East Asia, bond market, securitization, collateralized borrowing and
lending obligations (CBLO)
Explanation:
The Indian financial system is changing fast, marked by strong economic growth, more robust
markets, and considerably greater efficiency. But to add to its world-class equity markets, and
growing banking sector, the country needs to improve its bond markets. While the government
and corporate bond markets have grown in size, they remain illiquid. The corporate market, in
addition, restricts participants and is largely arbitrage-driven.
To meet the needs of its firms and investors, the bond market must therefore evolve. This will
mean creating new market sectors such as exchange traded interest rate and foreign exchange
derivatives contracts. It will need a relaxation of exchange restrictions and an easing of
investment mandates on contractual savings institutions to attract a greater variety of investors
(including foreign) and to boost liquidity. Tax reforms, particularly stamp duties, and a revamping
of disclosure requirements for corporate public offers, could help develop the corporate bond
market. And streamlining the regulatory and supervisory structure of the local currency bond
market could substantially increase efficiency, spurring innovation, economies of scale, liquidity
and competition. Such reforms will help level the playing field for investors.
In deciding the course for reform, however, the innovations and experiences of markets in the
region are also important. Developing markets often mimic more advanced European and North
American markets. But complex structures designed for diverse developed markets are
sometimes ill-suited to less-developed economies. Instead, looking to neighboring, emerging
markets at similar stages of development can be more useful. For example, India’s unique
collateralized borrowing and lending obligations (CBLO) system and its successful electronic
trading platform could usefully be studied by its neighbors, many of which suffer from limited
repo markets or which have (like India) tried unsuccessfully to move bonds on to electronic
platforms. India could benefit, by contrast, from the lessons of its neighbors in developing its
corporate bond market.
This paper reviews these issues and discusses policies that can help further develop India’s
debt market. Section II highlights and compares market development and outlook to emerging
East Asian economies. Sections III and IV summarize salient characteristics, reforms and
obstacles. Section V discusses the development and prospects for India’s securitization market.
Section VI looks at the main market participants and the depth of the pool of available investors,
arguably the most significant factor in market development. Section VII tackles policy issues.
And Section VIII concludes with a look at the importance of the lessons and innovations of other
countries.