Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Indian and Asian Money Markets

The September 2008 issue of the BIS Quarterly
has an interesting article on Asian money markets by
Loretan and Woolridge.

Their Graph 1 shows that as a percentage of GDP, the Indian
Treasury Bill market is quite tiny. The Treasury and Central Bank Bill
markets in countries like Malaysia, Phillipines, China and Taiwan are
much larger as a percentage of GDP. India’s large fiscal deficit
ensures that the government securities market as a percentage of GDP
is reasonably large and I had not thought of this as a problem
area. But Loretan and Woolridge data does suggest that there may be an
issue with the maturity composition of the debt. A lot of the Asian
T-Bill and CB-Bill market came out of sterilization operations and to
my mind this makes sense. If a lot of the reserves are invested in
short maturity assets, it makes sense to fund them with short
matutirity liabilities as well. The question is why did India use
Market Stabilization Bonds instead of Market Stabilization

The second thing that stands out in the paper is the volatility of
the interbank interest rate. Indian rates are so volatile that in
Graph 3 of the paper, Loretan and Woolridge plot India and Indonesia
on a separate graph titled “Higher Volatility
Markets”. Even between these two, it is the Indian interest rate
that swings more wildly – even in a graph of the two most
volatile rates, the Indian rate goes out of the graph. I can
understand this happening when the central bank was targetting money
supply rather than interest rates – even a monopolist cannot
simultaneously control the quantity of money and its price. But this
kind of volatility ought not to be present today.

Table 1 about turnover in derivatives market is distressing in
terms of what India is missing out on, but at least here most of
emerging Asia gives us company.


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