History of the Indian Debt Market

The debt is one of the most critical components in the financial system of any economy and acts as the fulcrum of a modern financial system.

The debt market in most developed countries is many times bigger than the other financial markets including the equity market. The US bond market is more than $13.5 trillion in size with a turnover exceeding $500 billion daily representing the largest securities market in the world. The size of the world bond markets is close to US $31.4 trillion which is nearly equivalent to the total GDP of all countries in the world.

The total size of the Indian debt market is currently estimated to be in the range of US $92 billion to US $100 billion. India’s debt market accounts for approximately 30 percent of its GDP. The Indian bond market measured by the estimated value of bonds outstanding is next only to the Japanese and Korean bond markets in Asia. The Indian debt market, in terms of volume, is larger than the equity market. In terms of daily settled deal, the debt and the forex markets market currently (2001-02) command a volume of Rs 25,000 crore against a meager Rs 1,200 crore in the equity markets (including equity derivatives).

In the post reforms era, a fairly well segmented debt market has emerged comprising:

1. Private corporate debt market
2. Public sector undertaking bond market and
3. Government securities market

The government securities market accounts for more than 90 percent of the turnover in the debt market. It constitutes the principal segment of the debt market.

The Indian debt market has traditionally been a wholesale market with participation restricted to few institutional players – mainly banks. The banks were the major participants in the government securities market due to statutory requirements. The turnover in the debt market
too was quite low a few hundred crores till the early 1990s. The debt market was fairly underdeveloped due to the administrated interest rate regime and the availability of investment avenues which gave a higher rate of return to investors.

In the early 1990s, the government needed a large amount of money for investment in development and infrastructure projects. The government realized the need of a vibrant, efficient and healthy debt market and undertook reform measures. The Reserve Bank put in substantial efforts to develop the government securities market but its two segments, the private corporate debt market and public sector undertaking bond market, have not yet fully developed in terms of volume and liquidity.

It is debt market which can provide returns commensurate to the risk, a variety of instruments to match the risk and liquidity preferences of investors, greater safety and lower volatility. Hence the debt market has a lot of potential for growth in the future. The debt market is critical to the development of a developing country like India which requires a large amount of capital for achieving industrial and infrastructure growth.

Regulation of Debt Market: The Reserve Bank of India regulates the government securities market and money market while the corporate debt market comes under the purview of the Securities Exchange and Board of India (SEBI).

In order to promote an orderly development of the market, the government issued a notification on March 2, 2000 delineating the areas of responsibility between the Reserve Bank and SEBI. The contracts for sale and purchase of government securities, gold related securities, Money market securities and securities derived from these securities and ready forward contracts in debt securities shall be regulated by the Reserve Bank. Such contracts, if executed on the stock exchanges shall, however, be regulated by SEBI in manner that is consistent with the guidelines issued by the Reserve Bank.

Link between Money Market and Debt Market:

The money market is market dealing in short term debt instruments (up to one year) while the debt market is a market for long term instruments (more than one year) The money market supports the long term debt market by increasing the liquidity of securities. A developed money market is a prerequisite of the development of a debt market.

Characteristics of Debt Market:

The characteristics of an efficient debt market are a competitive market structure, low transaction costs, a strong and safe market infrastructure and a high level of heterogeneity among market participants.