Traders see long and bumpy road to bond index

ond traders say in India, where 95% of the bonds are placed privately, the index would hardly serve any purpose

The H R Khan committee on corporate bond market has suggested creating a bond index that would act as a benchmark. But bond market participants say a lot of factors need to come in first, for the index to become relevant. The group has only made suggestions; leaving follow-up action to regulators.

A bond index is a standard practice in any developed market. In an index, bonds of similar maturity are grouped together to indicate pricing at different points of the yield curve. Indices are necessary for investors, particularly foreign investors, to discover pricing. However, in India, where 95 per cent of the bonds are placed privately, the index would hardly serve any purpose, say bond traders.

The Khan committee is not oblivious of the fact.

"Though indices such as Nifty 50 and BSE Sensex serve as popular benchmarks for stocks, designing debt indices has posed challenges in India as the market lacks breadth and depth," said the committee. It added, "Market participants, however, need a debt market index as a benchmark."

Even without enough liquidity, a bond index can be technically created with available data as all private placements have to be reported to the markets regulator.

But without enough liquidity, the index loses relevance. Interestingly, the creation of the index itself might bring liquidity in the market, bond traders say.

There are bond indices already. Rating agency CRISIL has bond indices, but those are hardly considered as benchmarks due to lack of depth in the market. Besides, Fixed Income Money Market and Derivatives Association (Fimmda) puts out a benchmark for valuing the bonds. Again, investors don't see it as a gauge for pricing.

"A lot of factors should come up to start the secondary market. If there is no secondary market to speak of, benchmarking hardly makes a difference," said a senior bond trader with a domestic bank treasury who did not wish to be named.

But benchmarking is necessary.

"It would definitely be needed at some point, when markets go live, to figure out returns," said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.
MANY HURDLES

• H R Khan panel for creating a corporate bond index
   
• Bond players say a lot of factors need to come in for that to happen
   
• Bond index is a standard practice in any developed market
   
• Instruments of similar maturity are grouped to indicate pricing on the yield curve