It can transmit the monetary policy much faster than banks
The Reserve Bank of India (RBI) Deputy Governor Subir Gokarn on Saturday stressed the need for developing a vibrant corporate bond market, which is essential for financing infrastructure projects in the country and asked various regulators to work in tandem to develop this market.
The need for developing an efficient corporate bond market is “driven by infrastructure financing,” said Mr. Gokarn while inaugurating an international conference on bond markets organised by the Bombay Stock Exchange (BSE) here. The government’s aim to invest around $1 trillion in the next five years (during the XII Plan period, 2012-17) in infrastructure projects would be fulfilled only if the country had a strong and vibrant corporate bond market. This market would act as a facilitation channel for both domestic capital as well as foreign capital.
Mr. Gokarn also stressed the need for a more widespread liquidity in government bonds with various maturities. At present, the benchmark 10-year Government Securities (G-Sec) are witnessing highest liquidity. Other dated G-Secs were traded with much lesser liquidity.
“One of the issues we have in terms of moving from policy actions to market outcomes is the uneven nature of liquidity across the yield curve. In India, everybody is focussed on the 10-year yield. However, the 10-year yield should not be the only determining factor in investment and consumption decisions,” said Mr. Gokarn.
The Deputy Governor, who is also in-charge of monetary policy in the central bank, said an effective bond market could transmit the monetary policy much faster than the banks. “As a vehicle for transmission of monetary policy, the effectiveness, efficiency and the thickness of bond markets, particularly treasury and government securities, is absolutely critical.” In this regard, he said, various regulators had to work in tandem to develop an efficient bond market.
“While India boasts of a world-class equity market, its bond market has yet to build critical mass,” said Ashishkumar Chauhan, Managing Director and CEO of BSE. The government bond market remained illiquid and the corporate bond market remained restrictive to specific participants.
There was a need for creating a deep, liquid and viable bond market, especially in the light of the infrastructure financing requirements running in to trillions of dollars, he added.