Some of the new private sector banks and foreign banks have started playing the role of market-makers in the corporate bond market by offering two-way quotes.
ICICI Bank, Citicorp Brokerage and IDBI Bank are some of the prominent players which are providing this facility.
The market-making exercise seems to have brought in more liquidity and transparency as the trading volumes in the corporate bond market, which were at Rs 2,682 crore in February when these entities started giving two-way quotes, have gone up to Rs 3,750 crore in April.
However, in May the volumes have come down to around Rs 2,000 crore on account of war fears. ICICI Bank is providing two-way quotes on 30-40 papers, while Citicorp Brokerage does the same for 10 papers.
Treasury officials at IDBI Bank said that it also provides quotes on papers depending on the market condition and the inventory of corporate papers it has.
ICICI Bank even has a dedicated team which is engaged in providing the two-way quotes.
N Balasubramanian, head, global market, ICICI Bank, said: "The market-making role that we are playing has two-fold advantages. First, it has increased the reach of the market. Entities which were not interested in trading in corporate bonds have also started coming in. Some more market-markers are also entering the market and providing two-way quotes."
Balasubramanian added: "Moreover, before starting this market-making role, we observed that the spreads between corporate bonds and government papers of similar maturity are too high and this was due to the illiquid nature of the market. Our exercise helped the spreads to come down."
Spreads in papers of Gujarat Ambuja have come down from 275 basis points (bps) to 185 bps, Reliance Petroleum from around 325 bps to around 160 bps and Mahindra and Mahindra from 325 bps to 250 bps.
However, according to Vijayan Subramani, regional head, emerging market sales and trading, Citibank: "It is difficult to say whether this exercise has brought down the spreads as some other market developments have also taken place and the market condition has also changed. This certainly has added to the transparency of the market."
As most market-makers operate under an obligation to offer continuos two-way quotes, except under certain circumstances, they are required to carry an inventory of stocks which implies commitment of capital and exposure to market risks.
According to ICICI Bank's general manager and head of treasury, N S Kannan: "The facility can be offered as an add-on facility to corporates and can be leveraged to improve corporate relationships and in cross selling of other ICICI Bank group products."
