Everyone's playing field

FIXED-INCOME UPDATE

, a 33-year old home-maker, logs on to her computer after her husband leaves for office daily five days a week. She trades in government securities from home.

Dhiraj Kasbekar, a 53-year high net worth individual, punts on the Rupa - the pan-South Asian currency. He makes money in the foreign exchange market by taking regular positions.

He does not need to support his greenback buying by any underlying transaction. Authorised dealers, too, have no overnight limits on their dollar positions.

Ketan Dalal, a 46-year old bond dealer, is making money with both hands by short-selling government securities.

Sinha, Kasbekar and Dalal operate in very different bond and foreign exchange markets today. Just a dozen years ago, they would have had the Reserve Bank of India breathing down their necks, but this is 2015 - and forex dealers are as free to do business as their counterparts in any other part of the world - as long as they are backed by adequate capital.

The regulator has also ceased to be a player in the forex market, which has gained enormous depth, particularly after the launch of the Rupa. There is no ban on treating the dollar as a commodity and punting on it.

Finally, with the bond and equity markets being fully integrated, there is huge arbitraging between the stock market and safe haven investments in government securities.

How do the money and forex markets of today differ from the ones we saw 10-12 years ago? Well, the government securities market had, even at that time, enough depth - with daily trade turnover varying between Rs 4,000 and Rs 6,000 crore (the pre-Rupa Indian rupee).

The bid-offer spread (that is the difference between the bid and offer prices) in government securities was as fine as a quarter basis point, which was comparable with the US Treasury spread. Possibly after Japan and Korea, India had the deepest and widest government bond markets in Asia.

Ironically, one of the reasons for the development of the government debt market was the huge fiscal deficit of the Indian government.

The only way to bridge the deficit was issuing more and more government paper.

Credit-starved banks chased such paper in the primary as well as secondary markets. At one point of time, banks' exposure to gilts accounted for over 50 per cent of their total asset portfolios.

In contrast, the corporate bond market was shallow with daily volumes touching just about Rs 200 crore. The corporate debt market was not developed as Indian companies were never comfortable with the 'market' per se. They were privately placing securities to raise money.

This 'arrangement' continued till the Reserve Bank of India and capital market watchdog Sebi woke up and forced companies to list their securities.

That shook the Rs 1.60 lakh crore unlisted bond market. After several bouts of protest, corporates went for listing their debt instruments and that changed the face of the corporate bond market.

There have been other developments, too, over the last decade. For instance, the overnight call money market has become a pure inter-bank market. As an offshoot of this, the repo or repurchase market now has enough corporate participants.

The derivative market has also developed well. The interest rate futures and options launched in 2005 changed the face of the debt market forever.

The greatest boost to the government securities market came when the government allowed short-selling in gilts, reversing its decades old ban on this. Finally, the retailing of government securities has been a success story.

The forex market in 2015 is also very different from what it was in 2003. The absence of the Reserve Bank from the market on most days has brought in volatility and complex forex options are thriving on this volatility.

If earlier the RBI strove for order and stability as it was extra cautious about sudden capital flows, the scenario rapidly changed after India's foreign currency assets crossed the $250-billion mark in mid-2006.

There was a deluge of forex flows as foreign investors and FDI poured in despite the inability of the Indian government to significantly dent the fiscal deficit. With the rupee strengthening continuously, foreign investors wanted a greater share of the action than ever before.

Now, with the Rupa replacing currencies in most of South Asia, the entire topography of the foreign exchange market has changed. The market is deep, alive and volatile.

The old Reserve Bank is no more a player - it is in fact merged into a pan-South Asian Monetary Authority. It only watches others play and the Kasbekars of the market regularly bet on the greenback, the Euro and the Renminbi Yuan - with only the last-named currency being stable.

VIGNETTES 2015

Government contemplates divestment of railways

After privatising public infrastructure facilities like roads, airports and seaports, the government of India is now contemplating divesting the largest commercial public sector entity - the railways.

Sources close to disinvestment ministry said that talks were on regarding the amount of stake that could be divested. Though it is clear that the government does not want to lose its foothold in the largest public utility service, it wants to rake in the benefits of offloading a prime-service network.

Analysts are predicting that the government will offer 49 per cent in parts of some loss-making railway zones first before going the whole hog with privatisation.

A group of ministers is working out the modalities of which railway zones to sell off first - the betting is that the loss-making zones created by Nitish Kumar in 2002-03 may be the first ones on offer. It could still fetch around Rs 58.5 billion since potential investors can gain control of lucrative coal-belt revenues.

In fact, the privatisation move has come at a time when the network needs to be enlarged. Talks of connecting the neighbouring countries are taking shape and this would necessitate additional investments which private players are ready to make.

"It would now be interesting to know who the bidders will be," says the head of research at a domestic research-outsourcing house. The Indian Railways has a network that spans over 1,75,673 km (1,08,706 km a decade ago) and runs 25,000 trains a day (11,000 a decade ago) across the country.

"Large companies will look forward to this opportunity to invest in the world's largest public sector railway network," the head of research adds.