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Informist, Wednesday, Nov. 27, 2024

 

--Dealers: PDs giving more liquidity for retail bond trades in secondary mkt

--Dealers: PD activity on Retail Direct surged this week after RBI criticism

 

By Aaryan Khanna and Pratigya Vajpayee

 

NEW DELHI/MUMBAI – Market-makers have rushed to provide liquidity to retail traders of Indian government bonds in the secondary market after a sharp ticking off from the Reserve Bank of India over the weekend.

 

Officials from the Indian central bank, including Deputy Governor T. Rabi Sankar, who attended a conference of the Primary Dealers Association of India on Saturday, had admonished primary dealers for not responding to requests for price quotes by retail users on the Negotiated Dealing System-Order Matching platform, consequently compromising the ability of small investors to execute trades. The lack of adequate price quotes constrained the retail activity in the secondary market for government bonds.

 

The RBI’s scolding seems to have had the desired impact rather quickly, with the request-for-quote segment on the Retail Direct platform coming alive in the last three days as primary dealers actively quoted not just liquid gilts but even state government securities.

 

"The RBI's communication on this has been constant since the platform's launch three years ago. It’s just that the implementation has been spotty between, say, a standalone primary dealership and a bank with a primary dealer function," an official at a primary dealership said. "I am not surprised that the platform has been active the last two days, because everyone would have descended upon the RFQ (request-for-quote) segment after what was said on Saturday."

 

RISING RETAIL ACTIVITY

The RBI’s Retail Direct platform allows non-institutional investors to bid at government bond auctions and trade these securities in the secondary market, with primary dealers responsible for providing liquidity. As per the guidelines, these market-makers are obligated to respond to requests for price quotes.

 

According to latest data from RBI Retail Direct, total cumulative traded volume on the platform was at INR 9.74 billion as on Monday, up INR 0.32 billion week-on-week. This is the second-largest increase in the traded volume according to the weekly data which goes back to October 2022. The largest increase was in the week ended Oct. 21 after data released in that week had shown India’s headline retail inflation had unexpectedly jumped to a nine-month high of 5.49% in September from 3.65% in August, pouring cold water over expectations of a cut in interest rates by the RBI.

 

"Over the last six months or so, primary dealers had lost interest and stopped quoting in the RFQ segment. It seems some retail users complained to RBI," an official with a primary dealership said. "The RBI was unhappy that retail market participants are not getting an exit."

 

To be sure, small investors’ interest in trading on the Retail Direct platform has increased in 2024-25 (Apr-Mar). According to RBI statistics, the cumulative traded volume has shot up this financial year, with bonds worth INR 3.30 billion being traded as of Nov. 25 as against INR 6.43 billion since the platform’s inception in November 2021 and up to the end of FY24. Meanwhile, retail investors’ total holdings of bonds have gone up by less than 10% in the same timeframe even as primary market subscriptions are up by a third, suggesting they pick up bonds at auctions and are keen to sell them in the secondary market.

 

HEADACHE FOR PDs

According to market officials, foreign-based primary dealers may also play a bigger role in the request-for-quote segment after largely sitting out so far. However, their holdings are primarily in liquid instruments.

 

Making the market for small investors comes with its problems given the size of trades involved--retail participants often request small ticket sizes, with odd lots as low as INR 10,000, while the smallest regular lot size is INR 50 million. As such, primary dealers active in the request-for-quote segment are often stuck with paltry amounts of illiquid bonds, officials said. Spiralling compliance is another reason why primary dealers have been cold to requests for quotes, with the RBI asking for weekly reports on activity in the request-for-quote segment and odd lot trades, market sources said. Earlier, such reports had to be submitted every quarter.

 

Another challenge for market-makers is to set aside a dedicated dealer and a system attached to the request-for-quote platform. Even before the recent pickup in activity, retail requests popped up only once in every 5-10 minutes and had to be answered, officials said. Given that most primary dealerships run lean trading teams, a dedicated presence in the retail segment greatly taxes resources, they said.  End

 

Edited by Saji George Titus

 

 

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