INTRODUCTION:

A financial market is a market in which people trade financial securities, commodities, and
other fungible items of value at low transaction costs and at prices that reflect supply and
demand. Securities include stocks and bonds, and commodities include precious metals or
agricultural products.
The financial markets have two major components:

Money market-The Money market refers to the market where borrowers and lenders
exchange short-term funds to solve their liquidity needs. Money market instruments are
generally financial claims that have low default risk, maturities under one year and high
marketability.

Capital market- The Capital market is a market for financial investments that are direct
or indirect claims to capital. The Capital Market comprises the complex of institutions
and mechanisms through which intermediate term funds and long-term funds are pooled
and made available to business, government and individuals. The Capital Market also
encompasses the process by which securities already outstanding are transferred .It is
further divided into primary and secondary market.
Based on security capital market is divided into two parts:
a) Equity market
b) Debt market

DEBT MARKET:
The National Stock Exchange started its trading operations in June 1994 by enabling the
Wholesale Debt Market (WDM) segment of the Exchange. This segment provides a trading
platform for a wide range of fixed income securities that includes central government securities,
treasury bills (T-bills), state development loans (SDLs), bonds issued by public sector
undertakings (PSUs), floating rate bonds (FRBs), zero coupon bonds (ZCBs), index bonds,
commercial papers (CPs), certificates of deposit (CDs), corporate debentures, SLR and non-SLR
bonds issued by financial institutions (FIs), bonds issued by foreign institutions and units of
mutual funds (MFs).
To further encourage wider participation of all classes of investors, including the
retail investors, the Retail Debt Market segment (RDM) was launched on January 16, 2003. This
segment provides for a nationwide, anonymous, order driven, screen based trading system in
government securities. In the first phase, all outstanding and newly issued central government
securities were traded in the retail debt market segment. Other securities like state government
securities, T-bills etc. will be added in subsequent phases. The settlement cycle is same as in the
case of equity market i.e., T+2 rolling settlement cycle.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:
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.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds and debentures and
Public Sector Units bonds. These bonds are issued to meet financial requirements at a fixed cost
and hence remove uncertainty in financial costs.

Debt Instruments:
There are various types of debt instruments available that one can find in Indian debt market.
Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on behalf of the
Government of India. These securities have a maturity period of 1 to 30 years. G-Secs offer fixed
interest rate, where interests are payable semi-annually. For shorter term, there are Treasury Bills
or T-Bills, which are issued by the RBI for 91 days, 182 days and 364 days.
Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an extensive range of
tenures up to 15 years. There are also some perpetual bonds. Comparing to G-Secs, corporate
bonds carry higher risks, which depend upon the corporation, the industry where the corporation
is currently operating, the current market conditions, and the rating of the corporation. However,
these bonds also give higher returns than the G-Sec.
Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits (CDs), 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. Banks can offer CDs which
have maturity between 7 days and 1 year. CDs from financial institutions have maturity between
1 and 3 years. There are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings
of CDs. CDs are available in the denominations of ` 1 Lac and in multiple of that.
Commercial Papers
There are short term securities with maturity of 7 to 365 days. CPs are issued by corporate
entities at a discount to face value.

QUESTIONS:
1) What are various advantages disadvantages of investing in Indian debt
market?
Ans: The following are various advantages of investing in Indian debt market The biggest advantage of investing in Indian debt market is its assured returns
. The returns that the market offer is almost risk-free (though there is always certain
amount of risks, however the trend says that return is almost assured). Safer are the

government securities.
On the other hand, there are certain amounts of risks in the corporate, FI and PSU debt
instruments. However, investors can take help from the credit rating agencies which rate

those debt instruments.

The interest in the instruments may vary depending upon the ratings.
Another advantage of investing in India debt market is its high liquidity. Banks offer easy
loans to the investors against government securities.

As there are several advantages of investing in India debt market, there are certain
disadvantages as well which arte follows:

As the returns here are risk free, those are not as high as the equities market at the same

time.
So, at one hand you are getting assured returns, but on the other hand, you are getting

less return at same time.

Retail participation is also very less here, though increased recently.
There are also some issues of liquidity and price discovery as the retail debt market is not
yet quite well developed.

2) What is the issuance process of G-sec and how can investors hold G-sec in
India ?

Ans: G-secs are issued by RBI in either a yield-based (participants bid for the coupon
payable) or price-based (participants bid a price for a bond with a fixed coupon) auction
basis. The Auction can be either a Multiple price (participants get allotments at their quoted
prices/yields) Auction ora Uniform price (all participants get allotments at the same price).
RBI has recently announced a non-competitive bidding facility for retail investors
in G-Secs through which non-competitive bids will be allowed up to 5 percent of the notified
amount in the specified auctions of dated securities.

G-Secs can be held in either of the following forms:

Physical Security (which is mostly outdated & not used much)

SGL (Subsidiary General Ledger) A/c with the Public Debt Office of the RBI. The SGL
A/cs are however restricted only to few entities like the Banks & Institutions.

Constituent SGL A/c with Banks or PDs who hold the G-secs on behalf of the investors

in their SGL-II A/cs of RBI, meant only for client holdings.

Same Demat A/c as is used for equities at the Depositories. NSDL & CDSL will hold

them in their SGL-II A/cs of RBI, meant only for client holdings.

3) What are recent developments in corporate debt market in India?

Ans: The most important recent development on the corporate bond market is the migration
away from physical certificates into dematerialized holdings at the depository. This process
began in 2000, but got major support from RBIs regulations:
i. From October 31, 2001 onwards banks, FIs, PDs and SDs were required to make fresh
investments in bonds and debenture only in dematerialized form.
ii. By June, 2002, these entities will be required to dematerialize all outstanding holdings of
corporate debt securities.
This led to a sharp rise in the stock and settlement of dematerialized corporate debt
securities at National Securities Depository Limited (NSDL). The corporate bond market is
highly non-transparent; hence these trends should be treated as being indicative only. In
January 2001, companies raised Rs. 2,690 crore through debt papers as compared with Rs. 3,
670 crore raised in the previous month. It was also lower than the average Rs. 3,424 crore
raised per month during April-December 2001. All the amounts were raised through private
placement. Interest rates offered on corporate bonds declined during January 2002 the range of
interest rates was 7.5 per cent to 10 per cent. There is a sharp rise in the stock of dematerialized
corporate bonds, from Rs. 7,960 crore in March 2001 to Rs. 59,735 crore in December, 2001.
Similarly, the volume of transactions settled in dematerialized form rose from Rs. 813 crore in
May 2001 to Rs. 9,499 crore in December 2001. These values are expected to continue to grow
till June 2002, by which time RBI-regulated entities have to completely eliminate physical
bond certificates. On the equity market, NSDL holds Rs. 3,16,040 core of securities. This is 5.3
times larger than the stock of corporate debt held by NSDL.
It has also been observed in recent years that the vast majority of corporate debt paper
has been issued on a private placement basis leading to lack of transparency and liquidity in the
corporate debt market. It was therefore; felt that regulatory action was needed to be taken by
both SEBI and RBI to regulate this market in order to induce greater public issuance of
corporate debt. To facilitate the growth of corporate debt market, the Reserve Bank is actively
considering introduction of repos in corporate bonds, to be settled through CCIL. Participation
of corporate in repo market is also being considered positively. Further, the securitization
market has been growing at a rapid pace, particularly after the SEBI/RBI introduced
regulations on the private placement in debt market.

4. What are the different types of instruments, which are normally traded in
this market?

Ans: The instruments traded can be classified into the following segments based on the
characteristics of the identity of the issuer of these securities:
Government Securities

Central Government

Zero-coupon

bonds

Coupon Bearing Bonds

Public Sector Bonds

Treasury Bills STRIPS

State Governments
Coupon Bearing Bonds
Government Agencies / Govt. Guaranteed Bonds,
Statutory Bodies
Public Sector Units

Private Sector Bonds

Corporate

Debentures
PSU Bonds, Debentures
Commercial Paper
Debentures,
Bonds
Commercial Paper,
Floating Rate Bonds,
Zero Coupon Bonds,
Inter-Corporate Deposits

Banks

Certificates of Deposits,

Financial Institutions

Debentures, Bonds
Certificates of Deposits,
Bonds

The G-secs 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. The other non-Govt securities are called
NonSLR securities.

5. What are the main features of G-Secs and T-Bills in India?

Ans: All G-Secs in India currently have a face value of Rs.100/- and are issued by the RBI on
behalf of the Government of India. All G-Secs are normally coupon (Interest rate) bearing and
have semi-annual coupon or interest payments with a tenor of between 5 to 25 years.. This may
change according to the structure of the Instrument. Eg: a 11.50% GOI 2005 security will carry a
coupon rate(Interest Rate) of 11.50% on a face value per unit of Rs.100/- payable semi-annually

and maturing in the year 2005. Treasury Bills are for short-term instruments issued by the RBI
for the Govt. for financing the temporary funding requirements and are issued for maturities of
91 Days and 364 Days. T-Bills have a face value of Rs.100 but have no coupon (no interest
payment). T-Bills are instead issued at a discount to the face value (say @ Rs.95) and redeemed
at par (Rs.100). The difference of Rs. 5 (100 95) represents the return to the investor obtained
at the end of the maturity period. State Government securities are also issued by RBI on behalf of
each of the state governments and are coupon-bearing bonds with a face value of Rs.100 and a
fixed tenor. They account for 3- 4 % of the daily trading volumes.

OBSERVATION:
Role debt market in transforming the Economy:
The state of the Indian capital market and its emerging scenario has attracted
considerable attention in recent years with economic reforms; capital market restructuring could
provide an important impetus to the real sector growth. While the markets for both debt and
equity could be developed to meet the emerging needs of the economy, the debt market in
particular, assumes great importance for the following reason:
1. Debt markets provide an assured rate of return to the investors, particularly when real and
2.

financial sector are all geared for change

Debt markets can signal about the long run prospects of the economy, through a

3.

constellation of growth-inflation interest rate expectation

A shift of focus from an automatic accommodation of fiscal deficits would mean that both
state and central governments would have to rely on debt market

4. The restructuring of public sector enterprises would involve greater access to capital markets
and with less equity dilution at the moment implies that they will have to depend on the bond
market, the equity market in India can be said to have become sophisticated and vibrant
during the last decade, although a number of regulatory pressures still cripple its growth.
However, the bond segment is still narrow and lacking dynamism. This is the sharp contrast
with the bond markets in the world over where these are a prominent segment and serve as
the base to all other markets.
Traditionally, government has shown preference for liberalizing the bond
market segment to the international investors than diluting the ownership of domestic
companies through equity. This situation has given enormous impetus to the growth of
foreign and Eurobond market with the opening up of the Indian debt and equity markets,
overseas investors seem to have been only attracted to the later.

India has been distinctly lagging behind other emerging economies in developing its
long-term debt market (LTDM), be it corporate or municipal bonds. The equity market has been
more active, developed and at the centre of media and investor attention. Traditionally, larger
corporates have used bank finance, equity markets and external borrowings to finance their
needs. Small and medium enterprises face significant challenges in raising funds for growth.

The Debt Capital Market- Current Scenario:

The bond market in India is typically classified into three categories viz. the
government, the corporate and the financial. Of these three the government bond market
constitutes 85%*1 of total DCM followed by the financial (10%*1) and corporate market (5%*1).
The issuers of these securities are mostly the central and state government, government agencies,
corporate and private sector banks. The investors mostly consist of RBI, banks, individuals, PFs
and MFs with the whole system coming under the purview of SEBI, RBI and the Ministry of
Corporate affairs. The government bond market, at present is quite established and has almost

reached its point of critical mass. However the most under-developed part remains the corporate
debt market, where even today more than 95% of the debt being issued is in the form of private
placements. Also the non-uniform stamp duty prices and long gestation periods to bring the
bond issuances into the market remain other deterrent factors which have retarded the growth in
this sector. According to one study in this field, [it has been estimated that in India, financial
liberalization remains one of the most important control variable, driving approximately 70% of
the growth in the debt capital market. Economic development and demographics contribute the
other 20% and 10% respectively.] Going forward we do not foresee a huge deviation from this
given data provided the fact that the country still remains an emerging economy where much
remains to be acted and done upon with regards to financial liberalization and economic
development. Among the mature economies, it is the aging population which drives the demand
for bonds as the investors look out for more and more pensions and life-insurance schemes. But
India, possessing relatively younger demographics cannot sustain on this factor and hence need
to concentrate on the other controlling variables.

Comparison with the G-Sec Market and Equity Market

In India the long-term debt market largely consists of government securities. The
market for corporate debt papers in India primarily trades in short term instruments such as
commercial papers and certificate of deposits issued by Banks and long term instruments
such as debentures, bonds, zero coupon bonds, step up bonds etc. In 2011, the outstanding
issue size of Government securities (Ceipntral and State) was close to Rs. 29 lakh crores
(USD 644.31 billion) with a secondary market turnover of around Rs. 53 lakh crores (USD
1.18 trillion). In contrast, the outstanding issue size of corporate bonds was close to Rs. 9
lakh crores (USD 200 billion). Moreover, the turnover in corporate debt in 2011 was roughly
Rs. 6 lakh crores (USD 133 billion) whereas in 2011, the Indian equity market turnover was
roughly Rs. 47 lakh crores (USD 1.04 trillion.)
Traditionally, the Banks have been the largest category of investors in G-secs
accounting for more than 60% of the transactions in the Debt Market. The Banks are a prime
and captive investor base for G-secs as they are normally required to maintain 25% of their
net time and demand liabilities as SLR but it has been observed that the banks normally

invest 10% to 15% more than the normal requirement in Government Securities because of
the following requirements:
1. Risk free nature of the Government Securities
2. Greater returns in G-Secs as compared to other investments of comparable nature
Debt market is an important part of any economy. If a debt market is efficient it can
greatly benefit to the economy and its financial system. Some benefits are
a. Reduction in the borrowing cost of the Government and enable mobilization of
resources at a reasonable cost.
b. Provide greater funding avenues to public-sector and private sector projects and
reduce the pressure on institutional financing.
c. Enhanced mobilization of resources by unlocking illiquid retail investments like gold
d. Development of heterogeneity of market participants

LEARNING OUTCOMES:
From this assignment I have understood various terms of Debt market and have come
across new terms. There are various changes in debt market which could have an positive or
negative impact on the economy. Indian Debt market has various advantages such as is its
assured return etc. This feature attracts many persons to invest in debt market without any fear.
As a coin has two sides i.e. heads and tails similar way debt market has also various
disadvantages such as assured returns are risk free but have low returns.
I have also come across various debt instruments every person wants to invest as they are
risk free and how important is the role of debt market in transforming the economy. Hence I
conclude that debt market is also important part of economy.

REFERENCES:
1. http://www.ijsr.net
2. http://www.mbaskool.com
3. http://www.ifmr.co.in

INDEX
SR .
NO
1. Introduction

PARTICULARS

PG.
NO.
1-3

2. Questions

4-8

3. Observations

9-11

4. Learning Outcomes

12

5. References

13