Who or what determines interest rates. Too many people think that it is the RBI decides where the interest rates should be. THAT IS WRONG. The RBI only determines the rate of interest in the over-night call market. RBI also signals the long term rates by issuing G-secs. However if the Rbi gets very ambitious and tries to issue low coupon bonds, the banks will just not subscribe!

Are banks important? As of now yes. They are the only players who seem to have appetite for the long end of the market – the 30 year bond. Otherwise most of the demand is for the 10 year bond with some residual demand for the 20 year bond or the 30 year bond with 10 years to go!

However, life insurance, general insurance, pension players, etc. could now become players in the market and the gov could see some demand (at right price of course). Even some long term GILT funds (mutual funds) could perhaps be significant players soon. NPS of course must be a big player now.

In the lending market mutual funds, life insurance companies, NPS  could all be looking for good corporate paper too. Suddenly the banks could feel left out. It is awesome to have the banks looking for business. For example P2P lending could reduce demand for small loans from banks, and the bigger loans could go to non bank lenders.

If the RBI is magnanimous enough to develop a secondary market for listed debt (it has been resisting it since the advent of SEBI) the bank’s role could be further reduced. Do not worry, that is not happening in a hurry. RBI is very clear about wanting to squat in markets and do NOTHING. They are lucky that NOBODY blamed for the Harshad scam, Ketan Parekh scam, PnB scam….they do not allow interest rates to be determined by the market players.

Sebi and Bse have done an amazing model for equity pricing. We have no such mechanism for debt pricing in India. Neither Wholesale nor Retail.

And we are in no hurry to go there..Read this article by aarati Krishnan

 

https://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/indian-bond-market-is-rebelling/article23263081.ece

  1. There is a very good reason for RBI (and by extension the GOI) to do so. See, when it comes to the bond market, the biggest borrower is the GOI. With RBI keeping a monopoly, GOI can control the interest rates so that they don’t go into the stratosphere (aka cannot be ‘manipulated’ by speculators)! Whether that is good or bad is debatable but it clearly means that between Taxes, Interest rates, and Inflation, the GOI controls your purchasing power more than your earning power!

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