[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...
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Pramod K.Yadav Ritesh Agarwal<br />
Doctoral Students, Indian Institute of Management (IIM)-Ahmedabad<br />
Indian Corporate Bond Market:<br />
<strong>The</strong> Road Ahead<br />
"In the age of globalization, where vast amounts<br />
of capital can be moved across the world with<br />
a mere computer keystroke, functioning bond<br />
markets are more important than ever. So is<br />
having a group of infl uential, globally known<br />
bond buyers who can alert the government if its<br />
policies are roiling markets, either by dumping<br />
its debt or speaking out. It's incredibly important<br />
that India's government and central bank continue<br />
to nurture the market's growth. India needs<br />
to take advantage of the favorable economic<br />
climate to strengthen regulation, improve transparency<br />
and bolster liquidity. It also needs to act<br />
faster to increase foreign investors' ability to move<br />
funds here. were put to productive use here.<br />
investor and business confi dence...India is<br />
stepping up efforts to do just that. For all China's<br />
advantages, bonds are one important area where<br />
India is ahead. It means markets here in Mumbai<br />
are likely to have their own Bill Gross before<br />
Shanghai does."<br />
William Pesek Jr.,<br />
International Herald Tribune,(IHT),<br />
October 11, 2004<br />
<strong>The</strong> Corporate Debt Market in<br />
India is underdeveloped, both in<br />
terms of the market participation<br />
and efficient price discovery; and the<br />
volume of fixed income securities is very<br />
small as compared to equity market.<br />
Most of the big Indian Corporate still<br />
seek bank finance and retained earnings<br />
to fulfill their funding requirements. Primary<br />
corporate debt market is dominated<br />
by non-banking finance companies and<br />
the total corporate debt market is a minuscule<br />
2 percent of the total debt market.<br />
Over the years, Indian firms have<br />
relied more on the equity market, retained<br />
earnings and bank loans to fulfill<br />
the funding requirements. To make the<br />
matter worse, the secondary market in<br />
corporate bonds has also not picked up<br />
as desired. Securities Exchange Board of<br />
India (SEBI) and the stock exchanges did<br />
realize the need of corporate bond and<br />
introduced various regulations to provide<br />
an impetus to the bond market; however<br />
none of the regulations or norm could<br />
yield the desired results. <strong>The</strong> debt market<br />
in India is broadly classified as government<br />
securities market and corporate<br />
securities market. <strong>The</strong> Indian debt market<br />
is highly skewed towards government<br />
securities market. Total outstanding debt<br />
of India has increased over the years and<br />
was around 36 percent of the GDP in<br />
2004-way below the mature financial<br />
markets (IMF,2004). <strong>The</strong> current government<br />
bond segment resulting from<br />
persistently high fiscal deficits and regulatory<br />
requirement in India is about 40<br />
percent of the GDP –at par with the well<br />
functioning financial markets. Nearly 90<br />
percent of the bonds issued in India are<br />
government bonds. <strong>The</strong> enormous <strong>size</strong> of<br />
the government bond market is not surprising<br />
considering the persistent high<br />
fiscal deficit and consequentially high<br />
public sector borrowings. Mandatory requirement<br />
on the part of banks to invest<br />
through statutory liquidity reserve<br />
(SLR,currently at 25 percent) compounds<br />
the problem. Perceived risk free nature<br />
132 THE <strong>IIPM</strong> THINK TANK