Liquidity in the sovereign bond market

Liquidity in the sovereign bond market

Liquidity in the sovereign bond market - Analysis

The Indian market for securities is gilded in the past few decades, primarily, is the market dominated by banks and institutions. Investments were primarily made in order to hold to maturity. As a result of activity on the secondary market used to be very subdued and, consequently, very low volumes. Existence of high coupon rates are usually assured adequate returns on investments even without churning the portfolio. Appetite for trading was almost non-existent. Moreover, the lack of depth and availability of timely and reliable market information served as a barrier against the development of this market.

However, with liberalization taking hold in the Indian financial markets over the past decade, the complexion of the market began to change rapidly. Although interest rates continue to be governed more or less for most of this decade, foreign exchange market started getting more and more driven by demand and supply. Rupee / dollar swap market started to have a significant impact in the short term rupee rates so much that a large segment of the market started thinking Swap rate driven term money rates as reference rates. Capital markets also saw a major step toward price transparency, leading to the development of human culture in the market. The market for securities, also gilded not remain isolated from this development.