Indian Stock Markets

Topics: Stock exchange, Bond, Stock market Pages: 36 (9531 words) Published: September 28, 2009
Current Issues

India's capital markets
February 14, 2007

Unlocking the door to future growth
India’s capital markets have experienced sweeping changes since the beginning of the last decade. Its market infrastructure has advanced while

India Special

corporate governance has progressed faster than in many other emerging market economies. But in contrast to several developed countries and Asian economies, India’s capital markets are still shallow, implying that further reforms are needed to make India a world-class financial centre. At nearly 40% of GDP, the size of India’s government bond segment is comparable to many other emerging market economies. Its corporate

bond market, however, remains small and is dwarfed by those of the United States, South Korea and Malaysia. India boasts a dynamic equity market. The sharp rise in India’s stock

markets since 2003 reflects its improving macroeconomic fundamentals. However, the large size of insider holdings and the small presence of institutional investors belie these impressive figures. Innovative products such as securitised debt and fund products based on alternative assets are starting to break ground. But an enabling

environment is not yet in place and there remains an overriding need to increase domestic investors’ knowledge regarding the merits and risks of capital market investing. A vibrant, well-developed capital market has been shown to facilitate investment and economic growth. We believe that persistent reforms in the

sector can support India’s already impressive growth trend in the coming years. Financial deepening beckons in India Stock and bond market capitalisation (end-2005), % of GDP Author Jennifer Asuncion-Mund +49 69 910-31714 jennifer.mund@db.com Editor Maria L. Lanzeni Technical Assistant Bettina Giesel Deutsche Bank Research Frankfurt am Main Germany Internet: www.dbresearch.com E-mail: marketing.dbr@db.com Fax: +49 69 910-31877 Managing Director Norbert Walter China Germany Brazil Argentina Mexico Indonesia 40 60 Thailand India UK 50 0 180 Korea Japan USA Bond market 150 100 200

Malaysia

0

20

80 100 Stock market

120

140

160

Sources: Federation of World Exchanges, BIS, IMF, DB Research

Current Issues

Introduction
India's stock markets: Scaling new highs
BSE index 16000 14000 12000 10000 8000 6000 4000 2000 0 90 92 94 96 98 00 02 04 06 Source: Bloomberg

Improving macroeconomic fundamentals, a sizeable skilled labour force and greater integration with the world economy have increased India’s global competitiveness, placing the country on the radar screens of investors the world over. The global ratings agencies Moody’s and Fitch have awarded India investment grade ratings, indicating comparatively low sovereign risks. These positive dynamics have led to a sustained surge in India’s equity markets since 2003 (see chart 1), attracting sizeable capital from foreign investors. Net cumulative portfolio flows from 2003-2006 (bonds and equities) amounted to USD 35 bn. Moreover, India’s stock market has outperformed world indices in recent years. And, despite its increasing correlation with world markets in recent years (see chart 2), India still offers diversification in global portfolios. The bond market is dominated by government bonds. Government bond issuances, resulting from persistently high fiscal deficits, as well as specific regulatory requirements, have underpinned the supply and demand conditions in India’s debt capital markets. Nearly 90% of total domestic bonds outstanding are government issuances (i.e. Treasury bills, notes and bonds), squeezing out corporate and other marketable debt securities (see chart 3). Initiatives to lift the corporate bond market from its nascent stages have been slow to progress, leaving companies unable to realise their optimum capital structure as a result. And unlike the derivative instruments that are available for equities, those for fixed income instruments...

Bibliography: Bank of International Settlements. BIS Quarterly Review (various issues). Basel. Switzerland. Bekaert, Geert, Campbell R. Harvey and Christian T. Lundblad (2003). Equity Market Liberalization in Emerging Markets. Federal Reserve Bank of St. Louis. USA. Farrell, Diana, Susan Lund, Ezra Greenberg, Jaeson Rosenfeld and Fabrice Morin (2006). Accelerating India’s Growth Through Financial Sector Reform. McKinsey Global Institute. San Francisco, CA. USA. FitchRatings (2004). Fixed Income Derivatives – A Survey of the Indian Market. Mumbai. India. Gorham, Michael, Susan Thomas and Ajay Shah (2005). India: The Crouching Tiger. http://www.futuresindustry.org/downloads/fimag/india_rev.pdf Hindu Business Line (2006). SEBI Opens New Avenue for Companies to Raise Funds, http://www.thehindusbusinessline.com/2006/05/09/stories/2006050904210100.htm Institute of International Finance (2006). Corporate Governance in India: An Investor Perspective. Washington, DC. USA. The Insurance Regulatory and Development Authority (2001). IRDA Investment Amendment Regulation. Mumbai. India. International Monetary Fund. Global Financial Stability Report (various issues). Washington, DC. USA. Lee, Kyungjik and Martin Hohensee (2004). The Indian Bond Market. Deutsche Bank Global Markets. Singapore. Mohan, Rakesh (2006). Monetary Policy and Exchange Rate Frameworks: The Indian Experience. Singapore. National Stock Exchange (2005). Indian Securities Review: A Review. Mumbai. India. National Stock Exchange. NSE Factbook (various issues). Mumbai. India. Patil, R.H. (2001). Broadbasing and Deepening the Bond Market in India. Wharton University. Pennsylvania. USA. Rawkins, Paul (2006). India’s Public Finances: Do They Matter? Deutsche Bank Research. Current Issues. Frankfurt am Main. Germany. Reserve Bank of India. RBI Annual Report (various issues). Mumbai. India. Securities and Exchange Board of India. SEBI Annual Report (various issues). Mumbai. India. Sharma, V.K. and Chandan Sinha (2006). Developing Corporate Bond Markets in Asia: The Corporate Debt Market in India. Basel. Switzerland. Shirai, Sayuri (2002). Have India’s Financial Market Reforms Changed Firms’ Corporate Financing Patterns? Asian Development Bank Institute. Tokyo. Japan.
© Copyright 2007. Deutsche Bank AG, DB Research, D-60262 Frankfurt am Main, Germany. All rights reserved. When quoting please cite “Deutsche Bank Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Deutsche Bank AG or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Deutsche Bank. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made. In Germany this information is approved and/or communicated by Deutsche Bank AG Frankfurt, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht. In the United Kingdom this information is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange regulated by the Financial Services Authority for the conduct of investment business in the UK. This information is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. and in Singapore by Deutsche Bank AG, Singapore Branch. In Japan this information is approved and/or distributed by Deutsche Securities Limited, Tokyo Branch. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Printed by: HST Offsetdruck Schadt & Tetzlaff GbR, Dieburg ISSN Print: 1612-314X / ISSN Internet and e-mail: 1612-3158
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