INDIAN DEBT MARKET

Debt market refers to the financial market where investors buy and sell debt securities, mostly in the form of bonds. These markets are important source of funds, especially, in a developing economy like India. Fixed income instruments could be securities issued by Central and State Governments, Municipal Corporations, Govt. Bodies or by private entities like financial institutions, banks, corporates, etc. Debt markets are vital to the sustained growth of any economy since they offer efficient mobilisation and allocation of financial resources. Debt instruments are used to finance developmental activities undertaken by the Government. They also aid in managing the liquidity **in the economy. Debt market is said to be a useful source of finance for Government of India. Currently, Indian economy has a deficit of 4.5% of GDP and is mainly financed through debt funding from different sources.

The government securities form a major part of the Indian debt market. As we can see from the table below, the outstanding debt of the Indian government forms 39.5% of the GDP, which is at par with that of the other developing and developed economies. The investors in the Indian debt market also favour government securities.

Indian debt market can mainly be classified into two categories:

(i) Government Securities Market (G-Sec Market): It consists of central and state government securities. It means that, loans are being taken by the central and state government. It is also the most dominant category in the India debt market.

(ii) Bond Market: It consists of Financial Institution bonds, Corporate bonds and debentures and Public Sector Unit bonds. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs.

In 2011, the outstanding issue size of Government securities or G-secs (Central and State Government) was close to INR 28 lakh crores or USD 622 billion (IndiaStat, 2012) with a secondary market turnover of around INR 53 lakh crores or USD 1.18 trillion (RBI, 2012).7 In contrast, the outstanding issue size of Corporate bonds was only INR 9 lakh crores or USD 200 billion (Khan,2012) and secondary market turnover roughly INR 6 lakh crores or USD 133 billion (SEBI, 2010)in 2011. Turnover in the Indian equity market was roughly INR 47 lakh crores or USD 1.04 trillion (RBI, 2012) in the same time period.

The corporate debt market can be classified into Primary market and Secondary market. In the primary market, corporate debt is via private placements like corporate bonds placed with wholesale investors like banks, financial institutions, mutual funds, etc. The Secondary market for corporate debt is available on platforms offered by various exchanges in the country.

The secondary debt market in India can be broadly categorised into –

Wholesale Debt Market – comprising of investors like Banks, financial institutions, RBI, insurance companies, Mutual funds, corporates and FIIs.

(a) Retail Debt Market – comprising of investors like individuals, pension funds, private trusts, NBFCs and other legal entities. 

There are two types of transactions in the market - 

1. Direct transactions between wholesale market participants. These account for approximately 25% of the wholesale market volumes. 

2. Broker intermediated transactions i.e. where brokers undertake dealings for banks, institutions or other entities. 

Why do we need a Debt Market? 

Debt markets are vital for the sustained growth of any economy since they offer efficient mobilisation and allocation of financial resources. Debt instruments are used to finance developmental activities undertaken by the Government. They also aid in managing the liquidity in the economy. Borrowings from the debt market allow the Government to reduce its dependence on external sources of funding. It also reduces the pressure on institutional financing to fund public sector or private sector projects.