Indian bond trading is in need of better market making
India’s bond markets, be it for corporate or government paper, need the buoyancy of greater liquidity. New market makers could play a key role in this if we incentivize them appropriately.
Whether apocryphal or real, it used to be said in the 90s and even the first decade of the 21st century that whenever India’s stock market had to be stabilized, North Block would speak to insurance companies or Unit Trust of India and ask them to intervene. With these big institutions buying shares, a market drop would be brought to a halt. They were not exactly market makers, but stabilizers. When the Reserve Bank of India (RBI) stopped the automatic monetization of the fiscal deficit in 1997 and made the government borrow money from the market, it was necessary to have some entities that would pick up the Centre’s bond issuances, or else funds would not be available to it. These were primary dealers, or PDs, who were paid a commission for playing that role. They came to be known as market makers who would provide buy and sell quotes in the secondary market for government bonds and thus help ensure sufficient liquidity.
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