Debt Market in India: Key

Issues And Policy

Recommendations
What is a debt market?
• A part of the capital market.
• A debt market is also known as a ‘fixed income market
as debt instruments pay fixed returns.

Do you know the impact of the debt market on the

economy?

• Opportunity for investors to diversify their investment

portfolio.
• Higher liquidity and control over credit.
• Better corporate governance.
• Improved transparency because of stringent disclosure
norms and auditing requirements.
• Less risk compared to the equity markets,
encouraging low-risk investments. This leads to inflow
of funds in the economy.
• Increased funds for implementation of government
development plans. The government can raise funds
at lower costs by issuing government securities.
The major reforms that took place
in the 1990’s
• Introduction of the auction system for sale of dated
government securities in June 1992.

• The RBI moved to computerize the SGL and

implement a form of a ‘delivery versus payment’
(DVP) system.

• Innovative products in form of Zero Coupon Bonds and

Capital Indexed Bonds (Ex. Inflation Linked) were
issued.

• The RBI setup “trade for trade” regime. All forms of

netting were prohibited.

• Wholesale Debt Market (WDM) segment was set

up at NSE.

• Interest Income in G-Secs was exempted from the

purview of TD.
Indian Debt Market Structure
• Issuer’s • Trading Platform

• Instruments • Clearing and

Settlement
• Investors Mechanism

• Rating • Instrument’s
agencies
• Investor’s
 Regulation’s For Debt
Market
• Public Debt Act, 1944

• Securities and Exchange Board of India

(SEBI)

• Local Authorities Loan Act, 1914

• Companies Act, 1956

• Securities Contracts (Regulation) Act, 1956

• Depositories Act, 1996

Classification Of Debt
Instruments
Risk Associated with Bonds

• Interest Rate Risks

• Yield Curve Risks
• Event Risks
• Volatility Risks
• Liquidity Risks
Indian’s Principal Investors
• Commercial Banks

Source: Goldman Sachs

 Indian’s Principal Investors
(Cont..)
• The Insurance Sector.

Source: Goldman Sachs

 Indian’s Principal Investors
(Cont..)
• Mutual Funds.
• Pension Schemes and Provident
Funds.
• Foreign Institutional Investors.
Issues of Concern
• a) Poor Quality Paper.
• b) Inadequate Liquidity.
• c) Investor Base.
• d) Regulatory Arbitrage
(additional costs on listed
companies).
• e) Debt versus Equity: Cost and
Risks.
 NEXT STEPS-where do we go
from here?
• Transparency

• Market unification and

communication

• Regulatory autonomy and

effectiveness

• Trustworthy and transparent

benchmarks
NEXT STEPS- where do we go from
here? Contd…
• Liquidity

• Natural investor base

• Macroeconomic stability

• Legal system

• Efficient equity markets to compete with

the dept markets
The Current State of Play of Debt
Market
• What are the negatives in the debt market?
:

1) Fiscal Deficit numbers on much

higher side than budgeted.
2) Additional supply of Rs.46000 crores
in dated securities through MSS
Bonds.
3) Bonds Price Slipped i.e 10 year
benchmark touched to 6.5 % as
compared to 5.85%.
What are the positives in the debt
market? :

• Inflation down to 3.92%.

• Oil below $40 / bbl.
• December IIP number at -2.00% v/s
expectation of -0.40%.
• Lower credit off take.
• Room for further rate cuts.
Thank You.