Bond volumes up; fund managers want more depth

Fund managers would generally welcome the livening up of the corporate bond market and would like to see more depth for better price discovery, liquidity, and a wider range of choice of papers.

While some believe that the corporate bond market volume should be at least 10 per cent of the gilts market volume, others believe anything less than 35 per cent would be insufficient.

At the current level, the volume in the bond market has been around 4.5 per cent of the average daily volume in the gilt market of around Rs 3,500 crore.

The ideal size of the corporate bond market, according to fund managers, should be between Rs 350-1,225 crore. "The volume is still quite thin. It will have to be at least 35 per cent of the government securities market," says Amitabh Mohanty, debt fund manager, Alliance Capital Mutual Fund.

He said the volume was "good but not hugely outstanding given that we all have huge income funds with corpus of over Rs 1,000 crore". Corporate bonds usually constitute around 40 per cent of the income fund's portfolio.

A. Balasubramanian, Birla Sun Life Mutual Fund's head of debt, agrees that the current volume was insufficient. "It should be 10 per cent of the gilts market volume as against the current 5 per cent," Sashi Krishnan, chief investment officer of Cholamandalam Mutual feels the market was still grossly undersized.

"The corporate bond market needs to be much more liquid," he said.

Why funds want deeper market?: According to Mohanty, in a deeper market, a fund manager would have a wider range of choice of papers. "If I were to restructure my portfolio, there will be a wide universe to choose from," he said.

Secondly, the impact cost of transaction would be significantly lower. Finally, if a fund were to sell large quantum of a certain bond, it can do that without affecting the market price as it happens in a shallow market. In a shallow market, the market price is based on small volumes, and therefore is sensitive to a large-volume trade, Mohanty said.

"An income fund in a deep market will be able to allocate 60-65 per cent to corporate bonds as against 40 per cent now," says a dealer from a mutual fund.

His fund is one of the biggest players in the corporate bond market today.

"One can add high-yielding papers without much impact cost," he added.

Recent surge in the bond market volumes: Fund managers attributed the surge in volume in the corporate bond market to the Reserve Bank of India's clarification on December 2003 that its norms governing banks' investments in unlisted debt will not apply to their investments in debt funds till December 31, 2004.

From January 1, 2005, banks can invest in only those debt funds that have less than 10 per cent exposure in unlisted securities. It means they can continue to invest in these funds till December 31.

Debt dealers agree that the number of deals per day has gone up. It will increase further with more corporates getting their papers listed.

Going forward: Fund managers and dealers presage happy days ahead for funds in the corporate bond market. Come January 1, 2005, most corporate, including many in the public sector, would have got their debt papers listed.

"The daily volume might go up to Rs 500 crore," say dealers. With more listings happening, banks' participation in the corporate bond market is expected to rise.

However, this may not happen immediately. It is a process and the listing by a few companies will not add depth to the bond markets. Probably, it would be two-three years before the fund managers' wishes are fulfilled. But the beginning has already been made.

Some of the public sector companies that have or are in the process of getting their paper listed are Indian Railways Finance Corporation, Power Finance Corporation, and Power Grid Corporation. Others may follow suit.