Reserve Bank of India deputy governor T Rabi Sankar said one of the reasons for the limited response to private participation in the government securities market (g-sec) is that it is tax inefficient compared to investing in mutual funds. funds, as the latter offers benefits of indexation.
Similarly, asymmetric accounting standards distort trading incentives and can also lead to inefficiencies in hedging activities, he said at a recent seminar organized by Financial Benchmarks India Private Limited (FBIL).
The vice-governor notes that certain regulations have the additional effect of negatively influencing market liquidity. “Coordinated efforts should be made to address the unintended consequences of such tax, accounting or regulatory requirements without undermining the basic purpose of such policies,” he said.
Sankar noted that the predominance of the buy-and-hold category of investors in the g-sec and corporate bond markets (banks, insurance companies, pension funds, provident funds) aligns trading activity in one direction, leading to volatile overshoots.
“Such deficiencies need to be addressed in order to achieve price efficiency and therefore a robust benchmark. One way to diversify the participant base is to open up the markets to the larger global investor base,” he said.
Segmentation of markets
The deputy governor noted that market segmentation fragments liquidity and leads to price differentials that affect the effectiveness of benchmarks.
“Given the context of investors’ need for diversity, the fragmentation of the rupee markets between onshore and offshore warrants deserves attention. Rupee interest rate and currency markets hold the promise of a broader investor base and global liquidity,” he said.
Sankar emphasized that for the benefits to pricing (and thus benchmarks) to materialize, it is necessary for price impulses to move freely from onshore to offshore and vice versa.
“This may require, among other things, a connected and interoperable infrastructure, common market makers across all segments, and ultimately a frictionless channel for investors to move from one market to another. There is a strong case for working on a long-term solution to this segmentation,” he said.