7/25/2019 Components of the Indian Debt Market

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Components of the Indian Debt MarketThe Debt Market in Indiais growing at a rapid pace and is becoming increasinglyinteresting for Investors worldwide. Any market has a number of components or should Isay participants. The Components of the Indian Debt Market include:

. Investors ! "ou and Me

#. $egulators

%. Debt Market &egments

The purpose of this article is to understand more about the $egulators of the Indian DebtMarket and the broad classifications of the Instruments available in the Debt Market.

The Indian debt market can be broadly classified into four &egments. They are:

. Money Market

#. 'ank and Corporate Deposits Market

%. (overnment &ecurities Market

). Corporate * +&, 'ond Market

Money Market:

Money market refers to the market where the re-uirement or arrangement of funds is fora short!term. &hort!term refers to a period of less than one year. As such money market

instruments have a maturity of less than one year. The most active part of the moneymarket is the market for inter!bank overnight i.e. less than a day/ call and term moneybetween banks and institutions and repo transactions banks0 borrowing window fromthe $'I/.

&ome of the commonly used Money Market Instruments include:

. Certificate of Deposits CDs/

#. Commercial +apers C+s/

%. Inter!'ank +articipation Certificates

). Inter 'ank Term Money

1. Treasury 'ills

2. 'ill $ediscounting3 Call 4 5otice 4 Term Money

etc.Money market instruments are mainly used by 'anks and other institutions to meet theirshort term cash re-uirements.

Bank and Corporate Deposits

'ank fi6ed deposits 7Ds/ are very common amongst the investors as a traditional

investment avenue for decades. The tenure of bank fi6ed deposits range from 8 days to9 years. Corporate deposits are nothing but fi6ed deposits where the issuer is a

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company or an institution other than a bank. ver here the interest rates vary dependingupon the credit -uality of the issuer.

&tories of Deposit Co.;s cheating investors by promising high returns have headlined

numerous newspapers in India but still the Investor population of this country stillcontinue to fall prey to false promises and greed. Any Debt Instrument that offers more

than 9< returns has a high probability of going bust and you must never and I mean

never trust them. =ven if you are slightly tempted to try these out3 limit your e6posure to

a few thousand rupees. Do not invest in lakhs and then feel for it in future>>>

Independent rating agencies assess the credit -uality of the company and assign the

rating indicative of the risk involved in the investment. Thus3 higher the credit rating

lower is the interest rate offered and vice!a!versa. ?owever3 sometimes companies raise

money without securing a credit rating from independent rating agencies. In such cases

companies often pay higher interest to attract investors. In such cases3 Investors must

be cautious and not invest too much money in a single company.

Government Securities Market

(!&ecs or (overnment &ecurities are debt papers issued by the (overnment with a face

value of a fi6ed denomination. In India3 (!secs are issued by (overnment of India at

face value of $upees ne ?undred in lieu of their borrowings from the market. These

can be referred to as certificates issued by (overnment of India through the $'I

acknowledging receipt of money in the form of debt3 bearing a fi6ed coupon or interest

rate or otherwise/ with interests payable semi!annually or otherwise and principal as per

schedule3 normally on due date of redemption.

(overnment &ecurities includes all 'onds3 T!bills and instruments issued by the Central

(overnment and &tate (overnment. These securities are normally referred to3 as @gilt!

edged; as repayments of principal as well as interest are totally secured by sovereign

guarantee and are 99< safe.

Corporate & PSU Bond Market

Corporate 'onds are issued by +ublic &ector ,ndertakings +&,s/ and private

corporations in India. These bonds are issued for a wide range of tenors. The normal

tenors range from year to 1 years. As compared to (overnment &ecurities which are

free of default risk corporate bonds may turn out to be risky. This riskiness depends on

the issuing company;s credit rating3 the business into which the

company is in3 the sector in which the company operates and the prevailing market

conditions. As with corporate deposits3 each issue comes with a Credit $ating which is

assigned by a credit rating agency. This rating determines the risk involved and as

always3 higher the risk3 higher will be the interest offered.

e!u"ators of the Indian Debt Market

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Bike any other market which needs to be regulated for its smooth and efficient

functioning3 the debt market in India is regulated by $eserve 'ank of India $'I/ along

with the &ecurities and =6change 'oard of India&='I/. f the four maor segments

outlined ust above3 some are regulated by &='I and some by $'I.

eserve Bank of India

The $'I has the Money market and the (!&ecs market under its purview. Apart from its

regulatory role it also performs several other important functions such as managing the

borrowing program of the (overnment of India3 controlling inflation by managing

policy4interest rates in the country/3 ensuring ade-uate credit at reasonable costs to

various sectors of the economy3 managing the foreign e6change reserves of the country

and ensuring a stable currency environment.

Moreover3 the $'I controls the issuance of new banking licenses to banks. $'I also

controls the manner in which various scheduled banks raise money from depositors.

7urther3 it controls the deployment of money through its policy measures on Cash

$eserve $atio C$$/3 &tatutory Bi-uidity $atio &B$/3 priority sector lending3 e6port

refinancing3 guidelines on investment assets etc.

Securities and #$chan!es Board of India

The &='I acts as the regulator for the corporate debt market and the bond market

wherein the entities raise money from the investors through a public issue. Theregulation comprises of manner in which the money is raised and tries to ensure a fair

play for the retail investors. It forces the issuer to make the retail investor aware of the

risks inherent in the investment3 through its disclosure norms. &='I also regulates the

Mutual 7unds and the instruments in which these mutual funds can invest. Investment

from 7oreign Institutional Investors 7IIs/ also falls under the &='I;s scanner.

%ther e!u"ators in the Indian Debt Market:

Apart from $'I and &='I3 there are several other regulators which are specific for

different classes of investors such as the Central +rovident 7und Commissioner and theMinistry of Babor to regulate the +rovident 7unds. Also3 $eligious and Charitable trusts

are regulated by the respective (overnment of the state in which these trusts are

located.

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