Time to press the pedal on the bond market

Time to press the pedal on the bond market

News that the central bank would release ₹1,76,000 crore to the central government led to a rise in bond price and a fall in yield. Both signal receding fears over New Delhi’s ability to manage the fisc. But the relief may prove premature, if Reserve Bank of India (RBI) and markets regulator Securities and Exchange Board of India (Sebi) do not undertake reforms to extend and deepen the market for debt.

Our bond market is stunted in comparison to those of more financially evolved nations, particularly that for corporate paper. Globally, government debt is the safest investment vehicle, unless the credibility of the regime and the central bank is in doubt. India’s 10-year government securities (G-sec) set the benchmark for bonds: luckily, yields (which move in a direction opposite to that of bond prices) have softened from a year high level of 8.2% to 6.6%. Renewed demand for G-secs should make it easier to finance the deficit. It helps that developed nation bond yields are among the lowest ever, buffeted by pessimism. Germany is offering negative interest rates and yields for all debt, overnight to 30-years, so lenders will pay borrowers to hold their IOUs. Swiss returns are negative for the next 50 years and American yields are inverted.

This makes Indian G-secs attractive for dollars. In two months, as ₹26,500 crore fled equities, nearly ₹16,000 crore of overseas money went into bonds. But unlike, say, the US, where daily bond trades rake up $700 billion, dwarfing equity transactions worth $200 billion, India’s situation is opposite. Daily bond deals are worth around ₹18,000 crore, half the value of equity changing hands. With reforms, a stronger bond market will make India’s financial system safer and free up liquid, low risk, long-term funds for economic development.