Fin Tech

Transformation of the Indian Debt Market

Written by Sashi Kumar M C, Investment and Merchant Banker – Digilah (Thought Leadership)

Director at Solargise

The Balance of payment crisis in 1991, brought the liberalization of the Indian economy and with it came reforms of the financial system and capital markets. The thrust of these reforms was to promote a diversified, efficient, and competitive financial system, with the objective of improving the allocation of resources through operational flexibility, improved financial viability, and institutional strengthening.

The contagion effects of the 1997-98 Asian financial crisis further lent impetus to strengthen the domestic financial system. Reforms principally focused to: (i) Mitigate risks in the financial system; (ii) Efficiently allocate resources to the real sector; (iii) Make the financial system competitive globally; and (iv) Open the external sector.

India’s capital markets too were injected with reforms, specifically through the creation of various institutions such as the Securities and Exchange Board of India (SEBI) in 1992, an insurance market regulator (IRDAI) in 1999, and a pension market regulator (PFRDA) in 2003. National Stock Exchange NSE was incorporated in 1992. It was recognised as a stock exchange by SEBI in April 1993 and commenced operations in 1994 with the launch of the wholesale debt market.

These were a fall out of the report by L M Bhole, a professor of Economics at IIT-Bombay, who noted that “There are two major inadequacies which characterize our stock market. First, while the primary market is widespread, i.e., the new issues are distributed nation-wide, the secondary market is narrow, localized, fragmented, and imperfect. The stock exchanges do not have uniform settlement periods and dates; there is no national clearing system, and they are not integrated into a single unified national market system. Second, while a significant part of the primary market is in debentures, almost the whole of secondary market is in equities. In many developed countries, debt securities, especially long-term debt securities, account for a major part of the trading volume on stock exchanges.

Not just that, Indian bond markets had to fight its way into the very quagmire of corruption and kickbacks, Lack of Transparency plagued the market, as did in-efficient price discovery methods. Defaulted Bond holders raised fingers on credit rating agencies and they in turn raised questions on data sanity. One to one negotiations led to unethical means to place the bonds at unjustified premiums that led to a mismatch to traded market yields.

In contrast to equity markets, the bond markets have been held back by the more restrictive regulatory framework. Several reforms were introduced to the government bond market in 1992 when the price of newly introduced bonds was set by auction.

But it was not until 2005—11 years after the equity market—that bond market became an electronic order limit market. Adoption of Technology to achieve the set goals.

Over the past two decades, the Reserve Bank of India has adopted a strategy to create an efficient market infrastructure to enable safe trading, clearing and settlement. State-of-the-art primary issuance process with electronic bidding and straight-through-processing (STP) capabilities. An efficient and completely dematerialized depository system within the central bank. Delivery-versus-Payment (DVP) mode of settlement. Real Time Gross Settlement (RTGS). Electronic trading platform (Negotiated Dealing Systems – Order Matching) (NDS-OM) and a separate Central Counter Party (CCP) in the Clearing Corporation of India Ltd (CCIL) for guaranteed settlement.

Today, The Bond market activity has grown rapidly. Government securities market (G-Sec), corporate bond market and derivatives markets have become broad-based in terms of participation. Technology has given the ease and access to transact from anywhere, it has helped broad base not only investors but also products. Thus, driving the overall debt market size to a little over USD 2 Tn.

Government Bonds make majority of the market with sovereign yield curve spanning up to 40 years. Corporate Bonds are expected to double their growth to achieve Rs. 65-70 Lakh crore by 2025. Primary market issuances have increased resulting in large benchmark issuances. The volumes in secondary market have increased. The bid-ask spread of on-the-run securities continues to be low and so are the impact costs.  

With the increase in Fintech activities in this space, bond markets have spread their wings to reach all investors. So much so, that RBI now allows individuals under the Retail Direct Scheme, to buy Government Securities, SDLs, T-bills and Sovereign Gold Bonds.

Amidst all these positives brought about by the adoption of technology and digitalization, the regulators forget a key component – Human Resource.  Since 1992, a generation of Bond Market professionals have served a full cycle and retired.  A huge set of Bond traders and dealers, both in the primary and secondary market today face a different future……?

Leave a Reply