Archive for June 5th, 2007

G-Sec yield curve is a public good

June 5, 2007

I had mentioned about this interesting report from RBI that covers India’s Financial Markets.

I was going through it over this weekend and I found this chapter on Government Securities was quite good. Sometime back a friend of mine had posed a question why do we need a G-Sec market and how does a secondary market in G-Sec help financial markets help. This paper does answer the same.

The need to develop the government securities market emerges from the three roles it seeks to play, i.e., for the financial markets, for the Government and for the central bank .

  • From the perspective of an issuer, i.e., the Government, a deep and liquid government securities market facilitates its borrowings from the market at reasonable cost. A greater ability of the Government to raise resources from the market at market determined rates of interest allows it to refrain from monetisation of the deficit through central bank funding. It also obviates the need for a captive market for its borrowings.
  • For the central bank, a developed government securities market allows greater application of indirect or market-based instruments of monetary policy such as open market (including repo) operations. A greater recourse to the market by the Government for meeting its funding requirements expands the eligible set of collaterals, thereby enabling the central bank to conduct monetary policy through indirect instruments. The expanding quantum of eligible collaterals has imparted flexibility to central banks of many developing economies in their conduct of monetary policy, especially in sterilising the capital flows.
  • The government securities market serves as the backbone of fixed income markets through the creation of risk-free benchmarks of a sovereign borrower. Ipso facto, it acts as a channel of integration of various segments of the financial market. 

The last of the three reasons is perhaps the most important and least understood.

We use government bond yields to calculate equity premiums and price most of the other securities depending on the bond market. So, if this market is liquid and there is active trading it ensures price discovery and helps price risk of other financial instruments in a dynamic manner. The report rightly says that G-Sec yield serves as a public good for the financial markets.

Posted in Blogs to Read, Debt markets, Discussion, reports | 8 Comments »

Assorted Links

June 5, 2007

1. Seven off shore funds dedicate USD 10 billion for investing in India’s infrastructure.

2. FIIs investing in India can take a position in Indian Rupee in Dubai. In its website Colin Griffith, Chairman of DGCX, says

“The DGCX Indian Rupee contract will for the first time in history enable individuals and companies to have the opportunity to hedge and trade their Indian Rupee risk on transparent and equal basis that an exchange provides. To date, the only market available to hedge Rupee risk is the non-deliverable forward (“NDF”) inter-bank market but that is not accessible to everyone. However the recent strengthening of the Rupee has necessitated the need for an efficient and easily accessible to all, risk management tool which is exactly what this DGCX contract will provide. As the Indian economy continues to grow at record pace; so will the need for this contract.

Each DGCX Indian rupee contract represents two million Rupees. Prices will be quoted in US Cents per 100 Indian Rupees, with a minimum price fluctuation of 0.000001 US Dollars per Rupee ($2 per contract). At any point in time DGCX will list the current and next two calendar months, plus the next three calendar quarterly months. The contract is here.

3. MIT the latest University to enter Indian equity market. It would be great of we could have the University help us in building our higher education system.  It would be great if we could be taught by the likes of Acemoglu, Blanchard, Temin, Poterba etc teach us once a while.

4. I came across this interestimg story as part of the news story that says Aussies are not just good at playing cricket but have active interest in stock-picking as well:

Adam Gilchrist’s skill isn’t limited to making bowlers cry on the cricket field, he’s quite a player at the stock exchange too. At a launch of an investment competition in aid of arthritis research, Gilchrist outplayed a market-savvy opponent in a contest to see who could pick the stock that would give the best return over a two-hour lunch break. It wasn’t a fluke either for Gilchrist had finished fourth, ahead of several pros, in an investment competition last year. He also revealed that stock talk happens often in the Australian dressing-room, with several players putting their seven-digit salaries to constructive use. Can you picture Andrew Symonds advising Shane Watson about stock options?

Posted in Blogs to Read, Cricket | 2 Comments »

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