Indian Stock Markets

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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 Editor Maria L. Lanzeni Technical Assistant Bettina Giesel Deutsche Bank Research Frankfurt am Main Germany Internet: E-mail: 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




80 100 Stock market




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

Current Issues

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...
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