The government securities market has been in the focus for the last few days because of the exit of foreign investors which is adding to the volatility of the rupee.
According to a report in the Times of India, FIIs have pulled out $4.5 billion from the Indian g-sec market during May 22-Jun 18. This has facilitated the 4% depreciation in the rupee during the period the report said.
The outflow has been attributed to the fear of an earlier-than-expected withdrawal of quantitative easing in the US.
Today, a day after the US Fed indicated that it will reduce its bond buying possibly this year, wary FIIs exited the gsecs in a hurry, as the rupee depreciated to hit a new low of 59.94 against the dollar.
The rise in the gsec yields was so sharp that the trade had to be halted briefly after the prices hit the lower circuit.
Here are seven things that you need to know about the market:
1) In India, government securities market is most dominant and active section of the debt market. The key instruments that are traded in this market are fixed rate bond, floating rate bonds, zero coupon bonds and inflation index bonds and treasury bills. Bonds issued by state governments, local bodies and municipal bodies are also traded here. The market is significant because it gives cues as to where the interest rates are headed in the economy.
2) The market participants are institutional investors such as banks, financial institutions, mutual funds, provident funds, insurance companies and corporates. Of these, banks are the dominant players due to the statutory liquidity ratio requirement. As per the RBI guidelines, banks need to invest 23 percent of their deposits in government securities.
3) Once the securities are issued, secondary trading in gsecs in dematerialised form is done on automated order driven system of the National Stock Exchange (NSE), Bombay Stock Exchange, and the Over the Counter Exchange of India (OTCEI).
4) Fixed Income Money Market and Derivatives Association of India and the Primary Dealers Association of India are the key self regulatory organisations active in the market. The former is a body of debt market (not just government bonds) participants and the objective is to aid the development of the bond, money and derivatives markets, as per its website. Primary dealers are the market makers
5) The Clearing Corporation of India Ltd, established in 2002, acts as the clearing house and as a central counterparty for transactions in government securities, imparting stability to the markets, according to the NSE. It says the CCIL has 154 members participating in the securities settlement segment.
6) The daily turnover of the gsec market today is hovering about Rs 30,000-50,000 crore.
7) The RBI and FIMMDA decide on the circuit breaker for government bond yields. If a bond falls or rises by a certain basis points, the trading halts. For example, 10-year bond, which is considered the benchmark paper, has a 10 basis point circuit. Trading in some papers was halted today due to circuit breakers. FIMMDA later said it has removed the trading bands for one day today.
Updated Date: Dec 20, 2014 19:41:01 IST