ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Indian Corporate Bond Market

The Indian corporate bond market has remained small in size despite a long history, several committee recommendations, and continuous reforms. It is besieged by several problems ranging from illiquid secondary market, narrow investor base, lack of diversity of instruments, crowding out by large public issuance, high costs of borrowing, information asymmetry, regulatory restrictions on demand, unavailability of repo options, to absence of well-functioning derivatives market and credit enhancement facilities that could absorb interest and default risks.

Long-run Determinants of Sovereign Bond Yields

Keynes’s supposition of short-term interest rates as the key driver of long-term government bond yields is investigated for India, after controlling for various key economic factors. It is seen that long-term interest rates of Indian government bonds are positively associated with the short-term interest rates of Treasury Bills. Higher long-term interest rates on IGBs are influenced by higher short-term interest rates, higher rates of inflation, a faster pace of industrial production and higher fiscal deficit (and vice versa). The bond market was disrupted during 2013 when yields rose sharply in India. Incorporating this structural break improved our findings.

Strange and Worrying International Market Liquidity

There seems to be a rise in illusory liquidity in international markets, which appears to be plentiful in quiet times, but vanishes at other times. “Flash crashes” are more frequent. Reforms that have made banks safer have contributed to this, leading to a withdrawal of short-term market participants, and causing long-term investors to act short term. There seems to be a trade-off between day-to-day liquidity and what I call “systemic liquidity.”
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