The September 2008 issue of the BIS Quarterly Review 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 T-Bills.
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.