Debt market

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By: Bharati V. Pathak
Indian Financial System, 5e
 Chapter Objectives

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To understand:

1. Meaning, history and characteristics of Debt market

2. Participants in the Debt Market
3. The Private Corporate Debt Market
4. The Public Sector Undertaking Bond Market
5. The Government Securities Market
6. Tools for managing liquidity in the Government
Securities Market
7. Measures to strengthen the Government Securities
Market Infrastructure
8. Impact of Reforms on the Government Securities
Market
Indian Financial System, 5e
By: Bharati V. Pathak
Debt market: Long Term Fixed
Income Securities Market

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 Segment: Private Corporate Debt market, Public
Sector Undertaking Bond Market, Government
Securities Market
 Importance: Helps in
 Mobilization and allocation of resources

 Financing development activities

 Facilitating liquidity management

 Pricing of non-government securities

 Regulation: Government Securities Market and

repo market in corporate debt securities– RBI
 Corporate Debt Market - SEBI

Indian Financial System, 5e

By: Bharati V. Pathak
Participants in the Debt Market

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Participants in the Debt market
 Central and State Governments
 Primary Dealers
 Public Sector Undertakings
 Corporates
 Banks
 Mutual funds
 Foreign Institutional Investors
 Provident Funds
 Charitable Institutions and trusts
Indian Financial System, 5e
By: Bharati V. Pathak
Types of Instruments Traded in
the Debt Market

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Indian Financial System, 5e
By: Bharati V. Pathak
The Private Corporate Debt
Market

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Primary Market:
 Funds raised through prospectus or private placement
 Debt issues compromise debentures and bonds
 Dominant investors: Mutual funds, Insurance companies,
banks
Secondary Market:
 Securities traded on the WDM segment of NSE, OTCEI and
on the BSE.

Indian Financial System, 5e

By: Bharati V. Pathak
Significance of the Corporate
Debt Market

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 Aids in economic growth by providing long-term capital.
 Supplements the banking system.
 A stable source of finance.
 Reduces cost of capital of corporates.
 Fosters market discipline and nurtures credit culture.
 Enables investors to hold a diversified portfolio.
 Enables a better asset-liability match for banks and
corporates.
 Facilitates infrastructure financing.
 Enables development of the municipal bond market.

Indian Financial System, 5e

By: Bharati V. Pathak
Explained: Why a corporate
bond market

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Indian Financial System, 5e
By: Bharati V. Pathak
 "Copyright © 2018 Pearson India Education Services Pvt. Ltd".
 Why has the Indian corporate bond
market failed to take off?
 Have the recent corporate defaults been
a dampener?
 What are the measures to improve the
debt market? How it will help?

Indian Financial System, 5e

By: Bharati V. Pathak
Factors Inhibiting the Growth of
Private Corporate Debt Market

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 Private corporate debt market
 Narrow issuer and investor base
 Primary issuance through private placement
 Lack of transparency
 Absence of a benchmark rate
 Absence of Market Making
 Dull secondary market
 Accessible only to high rated borrowers
 Foreign funds not allowed to invest
 Differential stamp duties levied by different states inhibiting the
growth of primary market
Indian Financial System, 5e
By: Bharati V. Pathak
New measures

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 Credit Guarantee Enhancement
Corporation
 Infrastructure Debt Funds
 what else?

Indian Financial System, 5e

By: Bharati V. Pathak
The Government Securities
Market (GSM)

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 Gilt edged securities and SLR securities
 Constitutes the principal segment of
the debt market
 Issuers: Central government, State
government, Semi-government authorities
including local government authorities
 Investors: Nationalized banks, Insurance
companies, State Governments, Provident
funds and trusts, Individuals, Corporates,
NBFCs, Primary dealers, FIs, FIIs and NRIs
 Types: Treasury bills, Government dated
securities

Indian Financial System, 5e

By: Bharati V. Pathak
GSM in the pre- 1991 period

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1930s - Cheap money policy
1950s - Programme of borrowing stepped up
- Interest rates stepped up
- Brokers and Jobbers carried out OMOs
- Government securities more popular with
individuals
1960s and 1970s - GSM dormant
1980s - Volume of debt expanded
Maturity structure skewed in favour of long- term debt
passive internal debt management

Indian Financial System, 5e

By: Bharati V. Pathak
Objectives of Reforms in the GSM

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 Increase operational autonomy of RBI
 Improve institutional infrastructure
 Improve breadth and depth of the market
 Enable sound legal framework
 Bring in technology related improvements
 Improve transparency

Indian Financial System, 5e

By: Bharati V. Pathak
Some Policy Measures
Undertaken in 1990s

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 Introduction of Repos
 Introduction of auction system
 Elimination of ad hoc T-bills
 Introduction of delivery v/s payment system
 Introduction of scheme of Ways and Advances
 FIIs permitted to invest
 Setting up of an electronic Negotiated Dealing System (NDS) and
Clearing Corporation of India Ltd (CIL)
 Introduction of the system of publishing a calender by RBI
 Introduction of Screen based order driven trading on stock exchanges
 Introduction of Retail trading
 Debt buy-back scheme
 Interest rate derivatives
 Introduction of Real time Gross Settlement (RTGS)

Indian Financial System, 5e

By: Bharati V. Pathak
STRIPS

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 Conversion of one underlying security into a
number of zero coupon securities
 Improves liquidity
 Benefits both issuers and investors

Indian Financial System, 5e

By: Bharati V. Pathak
 Retailing of Government
Securities

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 Individuals can buy government securities from
the RBI’s public debt office during auctions.
 Measures to Promote Retail Trading in
Government Securities
 Banks allowed to freely buy and sell securities.
 Exempted from TDS.
 Support to primary dealers.
 Dematerialization of securities.
 Setting up of mutual funds dealing exclusively in these securities.
 A non-competitive bidding facility
 Depositories allowed to open a second SGL account.
 Retail trading in stock exchanges.
Indian Financial System, 5e
By: Bharati V. Pathak
 Retailing of Government
Securities

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 Advantages of investing in Government securities
• Offer maximum safety Can be held in book
entry i.e., dematerialized or scrip less form.
• Available in wide range of maturities.
• Can be sold easily in the secondary market.
• Can be used as collateral to borrow funds in the
repo market.
• Simple, safe and efficient system of settlement.

Indian Financial System, 5e

By: Bharati V. Pathak
Investment by Foreign Portfolio
Investors (FPI) in Government
Securities

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 The RBI has permitted Foreign Portfolio
Investors to invest in government securities
and state development loans (SDL).
 The limits for investment are revised by the
RBI on a quarterly basis.

Indian Financial System, 5e

By: Bharati V. Pathak
 ‘When-issued’ Market in
Government Securities

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 When issued trading is trading of government
securities between the time a new issue is
announced and the time it is actually issued.
 When-issued Trading
 A tool to hedge risk.
 Facilitates distribution process.
 Facilitates price discovery.
 Enables PDs to bid and underwrite accordingly.
 Enhances liquidity in the government securities
market.

Indian Financial System, 5e

By: Bharati V. Pathak
The System of Ways and Means
Advances (WMA) for the Centre

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 Financing of Ad hocs led to:
 increase in money supply, inflation, passive
internal debt management
 Elimination of ad hocs in 3 stages:
 through limits on creation of ad-hocs, through a
transtition period of 2 years, the full- fledged
system of WMA
 Ways and Means advances:
 Accomodates temporary mismatches in
government receipts and payments,, Charged at
market related interest rates, Limit for WMA and
interest rate mutually agreed between the RBI and
government from time to time.

Indian Financial System, 5e

By: Bharati V. Pathak
Primary Market of Government
Securities

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Types: Treasury bills – 91- day
- 182-day
- 364- day
Government dated securities
Issue Mechanism: (a) Auctions – Uniform Price Auction
Multiple Price Auction
Competitive bidding
Non-competitive bidding
(b) Sale
(c) Private Placement with the Reserve Bank

Indian Financial System, 5e

By: Bharati V. Pathak
 Market Borrowings, Ownership
Pattern, Maturity Structure and
Interest Rates

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 Market borrowing increased more than ten-
fold
 Captive investors are banks and insurance
companies
 Maturity structure tilted at the short end
but now shifted to long term
 Weighted Average coupon rates on a
declining trend
 Yield spread narrowed

Indian Financial System, 5e

By: Bharati V. Pathak
Government Dated Securities –
Secondary Market

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Two segments : Wholesale institutional segment
Retail segment
Trading system: Earlier on telephone
Now screen based order- driven system
Trades: Outright trades
Repo transactions
Settlements: Physical form
Dematerialised SGL form: SGL I and SGL II
DVP system of settlement
-DVP III system – allows netting of transactions
– Improves liquidity

Indian Financial System, 5e

By: Bharati V. Pathak
Order Matching System (OMS) for
Trading in Government Securities

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 OMS is an anonymous platform on the NDS
of RBI
 Banks and Primary dealers allowed to trade
 Allows sellers and buyers to interface by
placing quotes. Transactions executed by
matching quotes.
 Bond brokers will be out of business

Indian Financial System, 5e

By: Bharati V. Pathak
Secondary Market Transactions
in Government Securities

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 Turnover increased
 Outright transactions predominant
 Factors inhibiting the growth:
 Hardening interest rates
 A long only market (cannot short sell)
 Higher inflation
 Rigid regulations
 A bearish outlook

Indian Financial System, 5e

By: Bharati V. Pathak
Tools for Managing Liquidity in
GSM

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Open market Operations:- Sale/Purchase of government
securities by the Central Bank
Uses: Neutralises excess liquidity
: Contains wide fluctuations in money and
foreign
exchange markets
Types: Open market sales
Open market purchase

Indian Financial System, 5e

By: Bharati V. Pathak
Infrastructure Development of
the GSM

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Primary dealer system : Act as market makers
 At present 19 PDs
 Subsidiaries of banks and FIs
 Categorised as NBFCs
Obligations of PDs and Facilities extended to them
 Underwrite primary issues
 Offer two-way prices
Facilities
 Prcurrent account and SGL
 A favoured ovision of access to the Repo market
 Access to LAF
Guidelines – Capital adequacy
 Brought under the purview of the Board for Financial Supervision
 Permitted to borrow upto 200 % of their funds
 Guidelines for non- government securities

Indian Financial System, 5e

By: Bharati V. Pathak
Measures to Strengthen GSM
Infrastructure

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 Negotiated Dealing System (NDS)
 Screen based electronic dealing and reporting of
transactions
 Clearing Corporation of India Limited
 Acts as the Central counterparty in the settlement of
all trades
 Manages various risks
 Clears all transactions in government securities and
repos reported on NDS
 Recognised as a systemically important payment
system

Indian Financial System, 5e

By: Bharati V. Pathak
Impact of Reforms on GSM

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 Increased operational autonomy of RBI
 Introduction of a new instrument
 Improvement of infrastructure
 Increase in transparency
 Increase in trading volumes
 Retail participation encouraged
 Improvement in clearing and settlement systems

Indian Financial System, 5e

By: Bharati V. Pathak