More reforms in store for debt market in FY16

The financial year 2015-16 is set to turn out to be a year for debt market reforms as experts believe there are many positive steps in the offing after the already announced measures. Though it is agreed that these reforms were long pending since many years, the street believes among the other measures Credit Default Swaps (CDS) could be relaunched, steps to enhance liquidity in corporate bonds may be announced and a full fledged screen based trading system for corporate bonds may be put in place.

In the Reserve Bank of India's (RBI) first bi-monthly monetary policy earlier this week, the central bank said that they will formulate a scheme for market making by primary dealers in semi-liquid and illiquid government securities.

"A similar step could perhaps be taken by asking merchant bankers in corporate bonds by asking them to provide liquidity in bonds. That will add to substantial amount of liquidity in bonds. Today once the bonds gets sold in the market, these merchant bankers no longer provide liquidity to the market," said R Sivakumar, head of fixed income and products, Axis Mutual Fund.

RBI also announced steps to boost retail participation in government securities. These measures include a web-based solution for all mid-segment and retail investors who have gilt accounts to participate in the government securities market and providing these investors direct access to both primary and secondary market platforms without any intermediary. For this, alternate channels of distribution of government securities would be created, RBI said.

"Retail participation in government securities will take a long time as fixed deposit rates are more attractive. There is scope for reforms in corporate bond market. For instance, it is critical to have a full fledged screen based trading system for bonds," said S Prabhu, head of fixed income at IDBI Federal Life Insurance.

Currently, secondary market activity in corporate bonds continues to be negligible when compared with the volumes in government securities. Besides that though CDS made its debut in 2011, but the instruments failed to take off. CDS are instruments where the buyers receives credit protection while the seller of the swap guarantees the credit worthiness of the debt security.

"The CDS market is needed because those who invest in corporate bonds, are exposed to interest rate risks as well as credit risks due to which there is a need for this instrument. We may also see reissue of bonds by corporates so that there is more liquidity in the market," said K P Jeewan, head of fixed income, Karvy Stock Broking.

According to Nirakar Pradhan, chief investment officer of Future Generali India Life Insurance, with respect to corporate bond market, there is also a need for more transparent settlement mechanism.