For 20 years now, there has been talk about bond market development in India. But by and large, the outcomes are unsatisfactory. In most of East Asia, bond market development has been plagued by the fiscal prudence of governments who balance budgets and do not issue bonds. By contrast, India is a hospitable country for bond market development, given massive fiscal deficits and thus a massive scale of debt issuance. Yet, in the week ended January 2, there were about 2,000 trades a day, which is a tiny pace of activity. Even more distressing is the concentration of trading in one or two bonds. In the same week ended January 2, 53% of the activity was concentrated in just two bonds (8.24% 2018 and 7.95% 2032). By any reasonable yardstick, it is hard to say that liquidity has percolated beyond five bonds. India has limped along for such a long time without a plausible bond market that it now seems like a luxury which we can do without. But as the events of 2009 will demonstrate, a bond market is a crucial shock absorber in bad times. The top 1,000 firms of India will be thirsty for debt capital in 2009, and if there had been a proper bond market, this would have made an important difference to economic conditions in 2009. It is important to get going on solving the long-standing problems of the bond market; better late than never.
The problems are: essentially only banks and PDs participate in clubby bond trades; the central bank runs an exchange and a depository; the central bank is also the investment banker to the government; over-reliance on OTC or bilateral contracting; and walling off foreign investors. It is interesting to see that the first time some innovations were attempted—with the exchange-traded repo that is run by CCIL named ‘CBLO’—an important victory was scored. The three ingredients of CBLO—trading on an exchange, an exchange that is not run by RBI, and a partial opening up to non-club-members—have clearly yielded results. But there is much more to bond market reform. The urgent need of the hour is handing over policy, regulation and supervision of the government bond market, the corporate bond market and the currency market to Sebi so that the successful ideas of the equity market can be applied to these markets.