An Asian Development Bank (ADB)-funded study on "the development of secondary debt market in India" has called for reduction in the direct role of the central government in determining the interest rates by establishing an independent public debt office (PDO) function.
This recommendation is line with the Reserve Bank of India's (RBI) oft-repeated stance seeking a separation of the debt and monetary management functions leaving the central bank only with the latter.
"Auctions in the government securities market are not fully market driven in that the RBI intervenes in a substantial way," said Stephen Wells of the International Securities Consultancy in a presentation.
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The study has sought reduction in the direct role of government as owner of financial institutions in a bid to permit the development of greater diversity of views in investments.
It has asked for doing away with restrictions on investment decision making by the institutional investors (such as pension funds and life insurers) and advocated outsourcing of investment decisions and treasury functions to professional fund managers.
Wells said there were not enough participants in the G-Sec market but in the same breath added that the sovereign rating of India was way below the foreign investors investment threshold to attract any substantial interest in the segment.
He contrasted the Indian scenario with the case of Germany where nearly 50 per cent of the debt issuance by the government is held by foreign investors and about 60 per cent of the trading was done by foreign institutions.
The study has called for the simplification/standardisation of public issuance procedures (for example : what happens in the event of a default is not documented presently) in order to remove the current bias towards private placement, thus improving access to the market by retail investors.
Wells said there were too many securities in the G-Sec market and called for consolidation of the issues, the number of which stands at around 125, so that the cost of capital can be brought down. He cited the example of Australia which now has only 15 issues of treasury securities after consolidation.
Wells said currently participants in the G-Sec market have to commit capital if they have to purchase the securities as they are not allowed to short-sell. By allowing short-selling, he said, volumes in the market will increase substantially.
The report has called for reduction in the direct role of government in the determination of interest rates by establishing an independent public debt office function and reduction in direct role of government as owner of financial institutions to permit the development of a greater diversity of views in investment decisions.
In a report titled "Development of the secondary debt market in India", launched by ADB today also suggested that short sales in debt trading should be permitted.
Among other recommendations removal of restrictions on investment decision making by institutional investors (such as pension funds and life insurers) and maximise outsourcing of investment decisions and treasury functions to professional fund managers has been included.
The report has also suggested changes to support a system of properly funded and independently managed pension schemes, simplify public issuance procedures, standardise and regularise private placement documentation to improve access to the market by retail investors.
Removal of impediments to the interaction of the institutional and retail market by ensuring that the banks can access stock exchanges on behalf of their customers has also been called for in the report.
It has been also recommended that post-trade transparency need to be improved in the secondary debt market to permit efficient price discovery and in the process encouraging wider participation in the market.