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India's Bond Trading Set to Get a Shot in the Arm, Crisil Says

India's Bond Trading Set to Get a Shot in the Arm, Crisil Says

India is headed for a pickup in corporate bond trading after major stock exchanges started offering electronic platforms for repurchase agreements for the securities, according to one of the country’s main rating companies.

The National Stock Exchange (NSE) started a repo market platform last month on corporate debt securities. BSE started a similar platform in May, allowing mutual funds, primary dealers, banks and insurers to use the repos to manage liquidity and asset-liability mismatches.

Such platforms act as intermediaries between parties for, essentially, pawning bonds for short-term loans. They will help boost liquidity that can then be used to invigorate corporate bond trading, the thinking goes.

In the absence of repos, market makers need to hold a large inventory of securities to provide liquidity to the secondary market.

“Globally, repos play a critical role in imparting liquidity to corporate bonds, which typically suffer from a lower trading ratio relative to government securities,” said Crisil Senior Director Somasekhar Vemuri in a note.

Asia Lags

Corporate bond secondary-market trading ratios by country

Source: Crisil

*Ratio is defined as daily traded volume by outstanding corp. bonds

The basket of repos currently only includes select AAA category bonds, A1+ rated commercial papers and certificates of deposit.

“Over the medium term, the expansion of basket repos to include AA category bonds will help deepen the liquidity for AA rated papers," said Crisil Director Ramesh Karunakaran.