This refers to the article, `Bond market in India: Shaken but not stirred', (Business Line, July 11). The point raised in the write-up is relevant in the current context.

There is a glaring need for bond market participants to get the comfort of a hedge against rising interest rates. Without this, the markets will continue to remain shallow and illiquid.

There seems to be some plan to introduce short selling in a phased manner in the government securities market. While this is a welcome move that will certainly improve trading volumes, the prima facie conditions of the proposal seem to be fairly restrictive.

We will have to wait and see the actual guidelines once they are released — as expected in the forthcoming Credit Policy review.

However, unless derivatives are encouraged, interest rates will continue to be extremely volatile due to illiquidity and shallowness.

While the OTC derivatives are currently allowed, there are a lot of unwritten restrictions that constrain the market. The regulators seem reluctant to allow banks to trade in the futures market, which has the potential to swell trading volumes swiftly. While bank treasuries are bleeding under the onslaught of rising interest rates, the Primary Dealers, for whom interest rate fall is the only cash cow, are facing doom. One hopes the July Credit Policy has something which addresses these issues.

Ravindra Gersappa

VP - Derivatives

BOB Capital Markets Ltd

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