Electronic Trading in India

India's debt markets have experienced rapid growth and along with that electronic trading also risen sharply, with the market growing at a CAGR over 75% since 2005.

India's debt markets have experienced rapid growth and along with that electronic trading also risen sharply, with the market growing at a CAGR over 75% since 2005, according to a recent Celent report. In spite of being a late starter, India is expected to have around 80% share of debt transactions being conducted electronically by the end of 2009, making it competitive with the US and Japan, the world's leading global debt markets. However, the Indian debt markets are small by international standards, constituting just about 1% of the global market, according to the new report, E-Trading in the Indian Debt Markets: Growth in the Downturn. Celent is a Boston-based financial research and consulting firm.

 Key findings of the report include:

India is one of the world's leading emerging markets, growing at a rate of 5-6% even through a period of global economic downturn. The introduction of electronic trading has increased transparency and liquidity in the market. The CAGR for the government bond market has been nearly 79% since the introduction of electronic trading.

Electronic trading will continue to become more popular, and the role of voice-broking will decrease further. NDS-OM has already set the trend, and the exchanges and the interdealer brokers (e.g., ICAP) are following it with a greater emphasis on electronic trading.

The corporate bonds market is dwarfed by its government bond counterpart. Currently, the corporate side of the bond market accounts for only 8% of the overall debt market, while government securities account for as much as 92%. The government debt market has greater liquidity and depth, and this is expected to continue even after the success of NDS-OM, the electronic platform.

India's retail market has failed to meet expectations. There had been high expectations for a rise in retail participation in the markets, especially from the exchanges. This has failed to materialize and both NSE and BSE have seen no trading in the segment. However, retail interest in debt funds is high because they are an attractive means of reducing volatility in the current economic climate. As much as Rs. 1.3 trillion has been mobilized in April-May 2009 by debt mutual funds, as opposed to an outgo of Rs. 285 billion in the previous financial year (i.e., April 2008 to March 2009).

A couple of the leading global IDBs have entered the market. However, the Indian market environment as it stands is not conducive to the entry and growth of IDBs due to the nature of the market and regulatory issues. But it is believed that the IDBs have an important contribution to make if the Indian market is to achieve its true potential by global standards, as they aid price discovery and improve access to large pools of liquidity while maintaining anonymity.

The derivatives market has suffered from regulatory hurdles and a lack of participation. It had seen high volumes for OTC interest rate swaps (IRS) until July 2008, but there has been a decline, and the turnover of IRS is only 30-35% of July 2008 levels. However, Celent believes that fixed income derivative products will increase in number and volume.

The Clearing Corporation of India (CCIL) has had a critical role to play in the growth of the industry. Its contribution has been vital in the success of the NDS-OM platform as well as the money markets for instruments such as collateralized borrowing and lending obligations (CBLOs). More innovative participants such as CCIL are required for the debt markets to succeed in the long run.

India's retail market has failed to meet expectations. There had been high expectations for a rise in retail participation in the markets, especially from the exchanges. This has failed to materialize and both NSE and BSE have seen no trading in the segment. However, retail interest in debt funds is high because they are an attractive means of reducing volatility in the current economic climate. As much as Rs. 1.3 trillion has been mobilized in April-May 2009 by debt mutual funds, as opposed to an outgo of Rs. 285 billion in the previous financial year (i.e., April 2008 to March 2009).

NSE has created a niche in the debt markets. The wholesale debt market of NSE commands an 8% share of overall government debt trading. Similarly, it has a 46% share in 2009 (until June) in the corporate bond market. However, BSE is struggling in the government bond market and has a 16% share in the corporate bond market.

To get the full report visit www.Celent.com