India's G-secs one of most developed among emerging markets, says RBI

The central bank study says secondary market volume needs to improve

India’s government securities markets is one of the most sophisticated in Asia, and is the largest after China and Malaysia, according to a Reserve Bank of India (RBI) study, but the secondary market volume needs to improve.

But the same cannot be said about corporate bonds, which is severely relatively underdeveloped, but is slowly improving leaning on the government debt market.

According to the study, in comparison to Asian peers, the maturity profile of outstanding Indian government debt is more uniformly distributed across short (less than 5 years), medium (5 to 10 years) and long (above 10 years) tenors, allowing investors the flexibility to invest as per their time horizons.

“Even relative to the wider emerging market (EM) universe, the average maturity of outstanding government debt is relatively high, indicating a lower rollover risk,” the study pointed out. The study has been done by Rituraj, G. Rajasekaran, Abhishek Kumar, Amit Meena and M. Jagadeesh of the financial markets regulation department (FMRD) and Rohit Kumar of the internal debt management department at the RBI.

The Indian yield curve is also among the flattest, reflecting the lower term premium across the term structure. The yield curve stretches up to 40 years, a feature not observed in most emerging market economies, the authors said.

However, not all the bonds are liquid, and therefore, certain bonds demand liquidity premium, which results in ‘kinks’ in the yield curve, as is the feature in the yield curves of some other emerging markets economies.

India’s bid-ask spread is among the lowest amongst Asia peers, reflecting a liquid market which do not materially increase for large transactions. “In fact, the market liquidity compares well even with developed economies in terms of impact cost and bid-ask spread,” the study said.

However, the turnover ratio – which is the ratio of turnover to outstanding stock of bonds, is lower in the Indian case, “indicating relatively lower volume in the secondary market.”

According to the study, in recent years, yield volatility for Indian government securities has generally remained higher than for bonds in China and Malaysia due to supply concerns and volatility in crude oil prices.

But, the volatility has been lower than that of bonds issued in Indonesia, Philippines and Vietnam.

Higher the yield volatility, lesser the predictability of the daily movements in bond yields.

India’s bond market is also not much open for non-resident investors as the government prefers to open the market gradually, but the lower participation has insulated the Indian markets from vulnerabilities of external shocks such as yield movements in the US Treasury notes.

“Going forward, increasing the liquidity across tenors in the sovereign yield curve, widening the investor base and developing the derivatives market can be the focus areas to augment the assiduously built market ecosystem for government securities,” the paper said.