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An Overview History In most of the countries, the debt market is more popular than the equity market. This is due to the sophisticated bond instruments that have return-reaping assets as their underlying. In the US, for instance, the corporate bonds (like mortgage bonds) became popular in the 1980s. However, in India, equity markets are more popular than the debt markets due to the dominance of the government securities in the debt markets. Moreover, the government is borrowing at a pre-announced coupon rate targeting a captive group of investors, such as banks. This, coupled with the automatic monetization of fiscal deficit, prevented the emergence of a deep and vibrant government securities market. The bond markets exhibit a much lower volatility than equities, and all bonds are priced based on the same macroeconomic information. The bond market liquidity is normally much higher than the stock market liquidity in most of the countries. The performance of the market for debt is directly related to the interest rate movement as it is reflected in the yields of government bonds, corporate debentures, MIBOR-related commercial papers, and non-convertible debentures. Concepts The debt market is a market where fixed income securities issued by the Central and state governments, municipal corporations, government bodies, and commercial entities like financial institutions, banks, public sector units, and public limited companies. Therefore, it is also called fixed income market. For a developing economy like India, debt markets are crucial sources of capital funds. The debt market in India is amongst the largest in Asia. It includes government securities, public sector undertakings, other government bodies, financial institutions, banks, and companies. Risks associated with debt securities The debt market instrument is not entirely risk free. Specifically, two main types of risks are involved, i.e., default risk and the interest rate risk.
Default Risk/Credit Risk arises when an issuer of a bond defaults on the interest or principal obligation. Interest Rate Risk can be defined as the risk emerging from an adverse change in the interest rate prevalent in the market, which would affect the yield on the existing instruments. For instance, an upswing in the prevailing interest rate may lead to a situation where the investors' money is locked at lower rates. If they had waited and invested in the changed interest rate scenario, they would have earned more.
Other risks associated with trading in debt securities are more generic in nature, such as:
the trades are normally decided by the seller and the buyer. whereas the WDM trading system. the Central government bonds are predominant and they form most liquid component of the bond market. known as NEAT (National Exchange for Automated Trading). which enables members across the country to trade simultaneously with enormous ease and efficiency. Indian Debt Market The Indian debt market is composed of government bonds and corporate bonds. The instruments traded can be classified into the following segments based on the characteristics of the identity of the issuer of these securities: Market Segment Government Securities Public Sector Bonds Private Sector Bonds Issuer Central Government State Governments Government Agencies / Statutory Bodies Public Sector Units Corporates Banks . In 2003. the National Stock Exchange (NSE) introduced Interest Rate Derivatives. However.• • Counter Party Risk refers to the failure or inability of the opposite party in the contract to deliver either the promised security or the sale value at the time of settlement. The trading platforms for government securities are the ‘Negotiated Dealing System’ and the Wholesale Debt Market (WDM) segment of NSE and BSE. Price Risk refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices. and reported to the exchange through the broker. In the negotiated market. is a fully automated screen-based trading system.
Commercial Paper Debentures. however. financial Institutions. The following debt instruments are available in the corporate debt market: . Guaranteed Bonds. They are referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the banks. as is the case in any market. including the state of money supply in the economy Interest rates prevalent in the market and the rates of new issues Future Interest Rate Expectations Credit quality of the issuer Note: There is. large corporates & other large investors. Commercial Paper. Debentures. which include banks. mutual funds. Debentures. Zero Coupon Bonds. STRIPS Coupon Bearing Bonds Govt. Floating Rate Bonds. The Indian primary Corporate Debt market is basically a private placement market with most of the corporate bonds being privately placed among the wholesale investors. Corporate debt market: The corporate debt market basically contains PSU bonds and private sector bonds. a theoretical underpinning to the determination of the price of the bond based on the measure of the yield of the security. Debt Instruments are categorized as: • • Government of India dated Securities (G Secs) are 100-rupee face-value units/ debt paper issued by the Government of India in lieu of their borrowing from the market. InterCorporate Deposits Certificates of Deposits. Debentures PSU Bonds. Treasury Bills. Bonds Price determination in the debt markets The price of a bond in the markets is determined by the forces of demand and supply. Bonds. Coupon Bearing Bonds. The price of a bond also depends on the changes in: • • • • • Economic conditions General money market conditions.Financial Institutions Instruments Zero Coupon Bonds. Bonds Certificates of Deposits.
US Treasuries. Apart from its role as a regulator. short. also known as short hedging. short-term interest rate futures like 90-day T-Bill and 3-month Euro-Dollar time deposits are more popular. Some of the assets underlying interest rate futures include US Treasuries. also known as long hedging. Hedging with Interest rate futures Interest rate futures can be used to protect against an increase in interest rates as well as a decline in interest rates.• • • • • • Non-Convertible Debentures Partly-Convertible Debentures/Fully-Convertible Debentures (convertible into Equity Shares) Secured Premium Notes Debentures with Warrants Deep Discount Bonds PSU Bonds/Tax-Free Bonds Main participants in the retail debt market include mutual funds. pension funds. Long-term interest rate futures include the 10-year Treasury Note futures contract. It controls and regulates the G-Secs market. When the interest rate goes up. . Hindu Undivided Families (HUFs). interest rate derivatives would be used for hedging in the near future. Regulatory Authority The regulators of the Indian debt market are: RBI: The Reserve Bank of India is the main regulator for the money market. an investor can protect himself against a decline in interest rates. an investor can protect himself against an increase in interest rates. NBFCs and RNBCs. managing the foreign exchange reserves of the country and ensuring a stable currency environment. it has to simultaneously fulfill several other important objectives. By selling interest rate futures. ensuring adequate credit at reasonable costs to various sectors of the economy. LIBOR Swap." The price of debt securities and. Tenure Interest rate futures contracts can have short-term (less than one year) and long-term (more than one year) interest bearing instruments as the underlying asset. is inversely proportional to the prevailing interest rate. and individual investors. and long-term interest rate risks can be managed with products based on Euro-Dollars. and the Treasury Bond futures contract. controlling inflation. corporate treasuries. private trusts. In India. and Euro-Yen futures. In the US. and Swaps in Europe and the US. interest rate futures. Euro-Dollars. the price of debt securities and interest rate futures goes down. housing finance companies. and by buying interest rate futures. state-level and district-level co-operative banks. such as managing the borrowing programme for the Government of India. therefore. provident funds. medium. and vice versa. Interest Rate Derivatives An interest rate futures contract is "an agreement to buy or sell a package of debt instruments at a specified future date at a price that is fixed today. Thus.
The RBI controls the issuance of new banking licences to banks. as we know it. it is the accessibility and the economy of debt capital that has come to play an important role in the sustainability and growth of a firm. Over the years. Each type of lending activity was supposed to be carried out at a pre-specified interest rate. corporates raise money from public through public issues. among other key factors. the RBI has moved slowly towards a regime of market-determined controls. Other than that. Further. . To begin from the point of truism. priority sector lending. Even at that. SEBI also regulates the investments of FIIs. debt capital helps in mitigating the enterprise risk across the entire capital structure. SLR. It forces the issuer to make the retail investor aware of the risks inherent in the investment and its disclosure norms. Consequently. guidelines on investment assets. the evolution and the development of the formal debt market. It controls the manner in which various scheduled banks raise money from depositors. it controls the deployment of money through its policies on CRR. is the availability of capital. it becomes all the more necessary that students and practitioners of entrepreneurism have an in-depth understanding of how the market for debt operates in India. Not the least bit to be compared with the significance of equity (owners’) participation. History of India’s debt market India was a late entrant into the capitalist form of economy. etc. debt capital also frees up the risk capital for the more vital functions and helps in leveraging the business potential of the firm. The RBI also administers the interest rate policy. one of the essential elements of a successful enterprise. it used to strictly control interest rates through a directed system of interest rates. It regulates the manner in which money is raised and to ensure a fair play for the retail investor. SEBI controls bond market in cases where entities esp. And we are still in the transitory phase. It also regulates the instruments in which these mutual funds can invest. Earlier. SEBI is also a regulator for the mutual funds and regulates the entry of new mutual funds in the industry. export refinancing. Given this strategic nature of debt capital. SEBI: The regulator for the Indian corporate debt market is the Securities and Exchange Board of India (SEBI). was initiated much later than other developed economies.
which is classified under T-bills and gilt. the opaqueness and information asymmetry have been some of the reasons for the tepidity in the growth of the corporate bond market. the Indian money market is a market for short term securities like T-bills. Both these forms of market are dominated by government debt. The papers traded are almost like a promissory note which usually has a fixed interest rate and a maturity of less than one year. the credit risk involved is considered to be low (though slightly higher than an FD). T-bills are government borrowings whose maturity is scheduled within one year. the lack of a wide investor base. Innovative products like zero coupon bonds. Additionally. capital indexed bonds. But from the point of view of this article. The depth and the appetite of this segment have started to expand lately. The market that deals with short term debt. and led to the introduction of the auction system for the sale of gilts and T-bills. is called the money market.. etc. were also introduced during this period. Moreover. the NDS (Negotiated Dealing Settlement) and the WDM (Wholesale Debt Market segment) system were launched by the RBI. debt maturity that exceeds the one-year timeline is considered to be a part of the bond market. The debt market in India is categorized by many standards. These debts are issued by the government.It was only after the financial reforms of 1991-’92 that the bond market in India received a major push. certificates of deposits. we shall dwell further on the money markets. given the large shadow of government borrowings under which it has had to operate. Much later. companies and financial institutions. The activity and the size of this market are relatively marginal. But the most important of them is based on duration. This era saw the end of the administered interest rate mechanism. it was in the last two decades that the technical and regulatory infrastructure was developed to make the debt capital market as we see it today. The dynamics of the corporate bond market are slightly different from the gilt. On the other hand. the tax incidence on the income from these schemes (depending on the plan) is usually lower than the one that the interest on savings accounts or FDs invite. This categorization is again based entirely on the duration of the maturity of the paper issued. which basically means debt of less than a one-year maturity period. repos and others. Money market opportunities for SMEs To begin with a brief rejoinder. banks. respectively. Since the securities in this market are less than one year. though. commercial papers. Concurrently. In short. and the source of these securities is the government/banks/highly-rated companies. BSE and NSE to facilitate the trade settlement. . gilts normally refer to government borrowings whose maturity is scheduled after one year. That is.
mostly in the form of bonds. The most distinguishing feature of the debt instruments of Indian debt market is that the return is fixed. which equals to the coupon rate. the earning it might be delivering to you may range from nil to almost nil. depending on the investment mandate of the fund. However. ultra-short term and the bond/gilt schemes of mutual funds. from the SME point of view. The capacity of the SME to tap the debt market is correlated directly to the growth trajectory of the corporate debt segment. the buyer (of bond) is giving the seller a loan at a fixed interest rate. the leveraging of the debt market can actually come in two forms. and second. the real and immediate gain potential for SMEs rests on their ability as the buyer of debt. in my understanding as an entrepreneur. India debt market is one of the largest in Asia. This means. as a supplier of debt. Now. A convenient alternative and yet a potentially enhanced ‘revenue-generative’ method of parking the surplus is in the liquid. In conclusion. the ability of a continuously evolving and self-propelling enterprise is its ability to not only learn and adapt to changes and opportunities. especially of short term debts. as the buyer. However. most of you might have already been doing this unknowingly! That is. Debt market refers to the financial market where investors buy and sell debt securities. but also to make full use of them as and when possible. especially in a developing economy like India. your money —parked in the current. Therefore.Therefore. Like all other countries. Avenues are also available for investing for longer horizons according to your risk appetite. returns are almost risk-free. These markets are important source of funds. This fixed return on the bond is often termed as the 'coupon rate' or the 'interest rate'. cash or FD accounts—is used by the banks to buy the debt and the money market securities for you. These schemes usually also invest your money in the money market and debt market securities. debt market in India is also considered a useful substitute to banking channels for finance. First. An investor can invest in money market mutual funds for a period of as little as one day. Classification of Indian Debt Market Indian debt market can be classified into two categories: .
Banks offer easy loans to the investors against government securities. The returns that the market offer is almost risk-free (though there is always certain amount of risks. but on the other hand. For shorter term. These bonds are issued to meet financial requirements at a fixed cost and hence remove uncertainty in financial costs. you are getting less return at the same time. investors can take help from the credit rating agencies which rate those debt instruments. those are not as high as the equities market at the same time. Retail participation is also very less here. It means that. however the trend says that return is almost assured). These securities have a maturity period of 1 to 30 years. Debt Instruments There are various types of debt instruments available that one can find in Indian debt market. Disadvantages As there are several advantages of investing in India debt market. Bond Market: It consists of Financial Institutions bonds. there are certain disadvantages as well. So.Government Securities Market (G-Sec Market): It consists of central and state government securities. Safer are the government securities. where interests are payable semi-annually. at one hand you are getting assured returns. G-Secs offer fixed interest rate. On the other hand. which are issued by the RBI for 91 days. loans are being taken by the central and state government. there are certain amounts of risks in the corporate. 182 days and 364 . There are also some issues of liquidity and price discovery as the retail debt market is not yet quite well developed. FI and PSU debt instruments. The interest in the instruments may vary depending upon the ratings. As the returns here are risk free. there are Treasury Bills or T-Bills. Corporate bonds and debentures and Public Sector Units bonds. However. Government Securities It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the Government of India. Advantages The biggest advantage of investing in Indian debt market is its assured returns. Another advantage of investing in India debt market is its high liquidity. though increased recently. It is also the most dominant category in the India debt market.
Banks can offer CDs which have maturity between 7 days and 1 year. FITCH. There are also some perpetual bonds. However. CDs from financial institutions have maturity between 1 and 3 years. the current market conditions. There are some agencies like ICRA. 1 Lac and in multiple of that. CDs are available in the denominations of Rs. . CPs are issued by corporate entities at a discount to face value.days. CARE. which depend upon the corporation. Commercial Papers There are short term securities with maturity of 7 to 365 days. Corporate Bonds These bonds come from PSUs and private corporations and are offered for an extensive range of tenures up to 15 years. which usually offer higher returns than Bank term deposits. are issued in demat form and also as a Usance Promissory Notes. There are several institutions that can issue CDs. Comparing to GSecs. these bonds also give higher returns than the G-Secs. CRISIL etc. that offer ratings of CDs. corporate bonds carry higher risks. Certificate of Deposit These are negotiable money market instruments. Certificate of Deposits (CDs). the industry where the corporation is currently operating. and the rating of the corporation.
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