New policy framework for bond market must

New Delhi, Feb 25 | Updated: Feb 26 2005, 05:31am hrs
The bond market, including government securities and corporate bonds, is yet to find a policy framework that can emulate the success of equity markets, economic survey says. A strategy has to be chalked out for the development of bond market in India, the survey emphasises.

India is an ideal environment for a liquid bond market given the large public issuance and sophisticated exchange institutions, the survey observes.

A striking manifestation of the weaknesses of the design of the bond market has been observed in the recent period, in the form of a significant dropoff of turnover, even though the market size has been steadily growing through large-scale public debt issuance, it says.

Though a high volume of issuance took place on the government securities market for all the four years (2001-2004) from Rs 1.11 lakh crore to Rs 1.19 lakh crore, volume of corporate bond issues was smaller. Primary corporate bond issues plunged almost 52%, from Rs 4,916 crore in year 2001 to Rs 2,383 crore in year 2004.

The market capitalisaton of the stock of outstanding government bonds rose sharply in 2003, reflecting a combination of fresh issuance and lower interest rates. The market capitalisation 2004, however, did not rise significantly, reflecting a rise in interest rates, the survey says.

Bond Check
Calls for policy framework to develop bond market
Primary corporate bond issues dip 52%
Market capitalisation, but turnover ratio plunges
Though bond market capitalisation doubled fueled by a high volume of issuance, bond market turnover in 2004 was at the levels seen in 2001.

Turnover ratio, which indicates the level of liquidity, declined from about 200% in 2001 to about 100% in 2004. The year 2004 was marked by negative returns compared with postive returns during the previous three years.

The bond market has not yet obtained exchange-traded futures and options, which can play a major role in price discovery, risk management and liquidity, the survey notes.