Gilts trade at standstill

The government securities market came to a virtual halt yesterday, reacting to the imposition of the 0.15 per cent transaction tax on all purchases of securities on the stock exchanges.

Trading volumes dipped to around 10 per cent of the volumes on average days, as dealers found the 0.15 per cent levy too high in a market where spreads are around 0.05 per cent.

There has been no past instance of transactions in the government securities market grinding to a halt, even though trading in corporate bonds was hit last year when regulators tried to curb the private placement of unrated corporate paper.

Bond brokers, under the umbrella of the Fixed Income Brokers' Association, will meet the finance minister next week along with the equity market brokers, on this issue.

The central bank also had assured the Fixed-Income Money Market and Derivatives Association of India (a bond traders' association) that it would take up the matter with the finance ministry, an RBI spokesperson told Business Standard.

There were stray deals done through the negotiated dealing system (NDS) regulated by the Reserve Bank of India.

"FIMMDA has been encouraging us to use the NDS platform as it does not attract the taxes, but price discovery and getting quotes are both time taking and inefficient," said a dealer.

The rise in inflation rate to 6.09 per cent for the week ended June 26 to 12 basis point higher than the week before, did not impact the market as there were very few deals. The yield on the 10-year benchmark 7.37 per cent 2014 closed at 5.86 per cent, unchanged from yesterday's close.

The majority of deals were done between banks and mutual funds in highly liquid bonds like 8.07 per cent 2017, 7.38 per cent 2015, and treasury bills.

Taking advantage of the illiquid market, some traders dealt in illiquid papers like the 12 per cent 2008 paper which was available at rock bottom prices.

The illiquidity has widened the bid-ask spread to a range of 25 paise to Re 1 as against the usual quote of 5-15 paise even in the dull markets. According to dealers, the wide gap being quoted, included the 0.15 basis point transaction tax.