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India’s stocks rally saves debt brokers

MUMBAI: A 2-1/2-year boom in India’s stock market has made millions of investors rich, and now it is even helping dealers from the shrinking bond market stay in work.

The launch in August of screen-based trading in the 25-billion rupee-a-day ($567 million) federal debt market has killed off telephone dealing, once dominated by 30 brokerages. As a result, broking house bond dealers have been rendered almost redundant.

But instead of sacking them, brokerages are retraining them to talk about earnings per share and price to earnings multiples to satisfy ever-increasing demand for equities. “Most of us have equities business, so some redeployment and shifting is taking place from debt to equity,” said Madhur Morarka, director at Mumbai-based Mata Securities Pvt. Ltd., one of the largest debt brokerages in India.

“Even if a person is not best suited for the equities job, we still say let us try him.” The Reserve Bank of India kicked off screen-based trading on Aug. 1 to improve transparency and curb volatility.

The move follows a trend around the world, with electronic bond trading taking off over the past seven years. A survey by the U.S. Bond Markets Association showed 77 electronic fixed income trading systems were operating in the United States and Europe in late 2003 versus 11 in 1997. In India, large investors such as state-run banks have taken to it as it cuts transaction costs and brokers say their share of bond business has shrunk by 55-60 percent since the system began.

In contrast, equity trading has more than doubled to 80 billion rupees a day on the Bombay Stock Exchange and the National Stock Exchange — both of which are screen-based. India’s stock market, the second-best performing major market in Asia this year, has rallied 32 percent since the start of January, backed by foreign inflows of $8.5 billion. Foreign fund investment in Indian bonds is capped at just $2.25 billion.

The surge in share trading has led to more demand for equity traders, research analysts and sales staff — which the redundant bond traders are partly filling. “We are starting to give our dealers the option of mutual fund distribution and corporate finance,” said a senior manager at another leading brokerage.

Double whammy: Though not all bond dealers are up to the new task at first, managers say time and money invested in a trader should not go to waste and they may be needed when fixed income returns to favour.

“They are currently overstaffing in some departments in anticipation of future growth,” said Monisha Advani, chief executive officer at head hunter EmmayHR.

The stocks rally has coincided with rising interest rates, causing bond market volumes to shrink from 45-50 billion rupees a day two years ago. Analysts say with development of new products, such as futures taking time, the market’s rough patch is expected to continue for a while. The yield on the benchmark 10-year bond which works inversely to the price, has risen 220 basis points from a record low in October 2003 so investors have booked losses and cut their exposure.

As a result, the central bank’s decision to introduce the new trading system has proved a double whammy to bond brokers as the platform is only open to banks and primary dealers. reuters

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