Bond market is becoming more attractive place for the investors specially when other investments opportunities are weaker. The Bond Market is the financial market where debt securities or bonds are traded. To know more about the bond market activities Capital Market's Analyst,Hemangi Kelkar spoke with Namrata Padhye, (Analyst, Fixed Income Research), IDBI Gilts Limited.
The development of a corporate bond market in India has lagged behind in comparison with other financial market segments owing to many structural factors. Kindly share your view on the topic?
Various committees have already submitted the report to SEBI and Government of India .The subject is already in public domain. We expect the required structural changes to take place gradually in the bond market in India.During the previous boom period, banks preferred to increase exposure to secured corporate bonds / debentures. Now we find LIC very active in subscribing to corporate bonds / debentures, but there is hardly any interest seen amongst banks. Kindly share your views in this regard.
Majority of the funds with banks are directed toward their lending activities. Moreover, the banks under statutory norms are also required to invest primarily in the government securities. So, only in case of any residual exposure limit will the banks subscribe to the corporate debt issuances. As far as corporate bond investment is concerned, banks need to mark them to market, which is not the case in terms of the advances made directly to corporates. Secondly, the inflows on investments in form of repayments are majorly towards the maturity, whereas in case of loans there are considerable interim inflows. Thirdly, liquidity in secondary corporate bond market can make the investments sticky and lead to problems in ALM. Last but not the least, in the present circumstances maintaining sound capital adequacy ratio with RBI has also taken prominence.Slow down in US in particular and global slowdown in general will change dynamism of global economy. In what way it will have impact on our debt market?
We have seen sound investment in debt market from FIIs when equity market was not performing up to the mark. Global slowdown particularly in US will shift flow of money to emerging market. At this juncture, Indian debt markets have huge opportunity to attract this fund.In recent RBI's policy we had seen neutral view on interest rates, after heavy rate cut since October 2008. What will be the outlook for the short and long tern interest rates?
We have seen rate cuts from RBI since October 2008 to till date. Overall bond market is expecting another round of rate cut. The stance of the RBI is very clear on liquidity and interest rates. There is softening bias on interest rates.The government is planning to raise Rs 46000 crore of bonds between 20th February and 31st March 2009. Despite favorable trends like fall in inflation and easing interest regime, will this not lead to hardening of yields in the short term? With MSS bonds outstanding balance already in excess of Rs 91000 crore, do you think that there is further room for RBI to repurchase bonds to avoid sharp rise in bond yields?
The RBI is closely monitoring the liquidity and interest rates movement prevailing in the economy. To ensure adequate liquidity in the system, the RBI has announced its willingness to conduct open market operations through the auction-based mechanism. This should improve the bond market sentiment and also aid in removing the disparities in the yield curve. The option of repurchasing MSS bonds remains open, but further clarity is required.Despite the fact that inflation and interest regime are coming down, the bond yields have surged from 5.08% on 02 January to 6.3% on 09 February 2009. What other factors beyond inflation, interests regime and government's borrowing programme are significantly influencing bond yield rates.
Apart from the above-mentioned factors, the developments in both the domestic and global economies also impact the bond market movements.Since January many premium PSUs and banks have also been forced to postpone and/or scrap their bond issues due to volatile and perceived high yields. When do you expect bond markets to stabilize and allow smoother flow of funds?
We expect the bond market to stabilize going ahead, especially with the improvement in government securities market. The soft bias on interest rates and further decline in inflation numbers would also aid the improvement. RBI has also taken steps to ensure adequate liquidity in the market.Do you think India is heading for deflation (negative inflation)? How prepared are the banks, considering the fact that it will have adverse consequences not only in terms of fall in profitability of their clients, but they may have to re-work the way working capital advances are made / monitored (as the value of stocks will keep coming down)
We are expecting further fall in inflation rate in India; estimated at 1.5-2% by March 2009. There is a case for negative inflation number in fiscal year 2009-10 for roughly one to two quarters. However, the actual tenor of negative readings would also depend on global factors. Reduction in oil prices has resulted in lower inflation on domestic front. The domestic banking sector, with its advanced monitoring tools, is well prepared for the above-mentioned scenario. As a result we do not expect the banking sector to face any major problems.What is your expectation from the Interim Budget to be placed in the parliament? What measures do you expect on direct and indirect tax front?
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