Components of the Indian Debt Market

The Debt Market in India is growing at a rapid pace and is becoming increasingly
interesting for Investors worldwide. Any market has a number of components or should I
say participants. The Components of the Indian Debt Market include:

1. Investors - You and Me

2. Regulators
3. Debt Market Segments
The purpose of this article is to understand more about the Regulators of the Indian Debt
Market and the broad classifications of the Instruments available in the Debt Market.
The Indian debt market can be broadly classified into four Segments. They are:

1. Money Market
2. Bank and Corporate Deposits Market
3. Government Securities Market
4. Corporate & PSU Bond Market
Money Market:
Money market refers to the market where the requirement or arrangement of funds is for
a short-term. Short-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 money
market is the market for inter-bank overnight (i.e. less than a day) call and term money
between banks and institutions and repo transactions (banks' borrowing window from
the RBI).
Some of the commonly used Money Market Instruments include:

1. Certificate of Deposits (CDs)

2. Commercial Papers (CPs)
3. Inter-Bank Participation Certificates
4. Inter Bank Term Money
5. Treasury Bills
6. Bill Rediscounting, Call / Notice / Term Money
etc.
Money market instruments are mainly used by Banks and other institutions to meet their
short term cash requirements.
Bank and Corporate Deposits
Bank fixed deposits (FDs) are very common amongst the investors as a traditional
investment avenue for decades. The tenure of bank fixed deposits range from 7 days to
10 years. Corporate deposits are nothing but fixed deposits where the issuer is a

company or an institution other than a bank. Over here the interest rates vary depending
upon the credit quality of the issuer.

Stories of Deposit Co.s cheating investors by promising high returns have headlined
numerous newspapers in India but still the Investor population of this country still
continue to fall prey to false promises and greed. Any Debt Instrument that offers more
than 10% returns has a high probability of going bust and you must never and I mean
never trust them. Even if you are slightly tempted to try these out, limit your exposure to
a few thousand rupees. Do not invest in lakhs and then feel for it in future!!!
Independent rating agencies assess the credit quality of the company and assign the
rating indicative of the risk involved in the investment. Thus, higher the credit rating
lower is the interest rate offered and vice-a-versa. However, 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 cases, Investors must
be cautious and not invest too much money in a single company.
Government Securities Market
G-Secs or Government Securities are debt papers issued by the Government with a face
value of a fixed denomination. In India, G-secs are issued by Government of India at
face value of Rupees One Hundred in lieu of their borrowings from the market. These
can be referred to as certificates issued by Government of India through the RBI
acknowledging receipt of money in the form of debt, bearing a fixed coupon or interest
rate (or otherwise) with interests payable semi-annually or otherwise and principal as per
schedule, normally on due date of redemption.
Government Securities includes all Bonds, T-bills and instruments issued by the Central
Government and State Government. These securities are normally referred to, as giltedged as repayments of principal as well as interest are totally secured by sovereign
guarantee and are 100% safe.
Corporate & PSU Bond Market
Corporate Bonds are issued by Public Sector Undertakings (PSUs) and private
corporations in India. These bonds are issued for a wide range of tenors. The normal
tenors range from 1 year to 15 years. As compared to Government Securities which are
free of default risk; corporate bonds may turn out to be risky. This riskiness depends on
the issuing companys credit rating, the business into which the
company is in, the sector in which the company operates and the prevailing market
conditions. As with corporate deposits, each issue comes with a Credit Rating which is
assigned by a credit rating agency. This rating determines the risk involved and as
always, higher the risk, higher will be the interest offered.
Regulators of the Indian Debt Market

Like any other market which needs to be regulated for its smooth and efficient
functioning, the debt market in India is regulated by Reserve Bank of India (RBI) along
with the Securities and Exchange Board of India (SEBI). Of the four major segments
outlined just above, some are regulated by SEBI and some by RBI.
Reserve Bank of India
The RBI has the Money market and the G-Secs market under its purview. Apart from its
regulatory role it also performs several other important functions such as managing the
borrowing program of the Government of India, controlling inflation (by managing
policy/interest rates in the country), ensuring adequate credit at reasonable costs to
various sectors of the economy, managing the foreign exchange reserves of the country
and ensuring a stable currency environment.
Moreover, the RBI controls the issuance of new banking licenses to banks. RBI also
controls the manner in which various scheduled banks raise money from depositors.
Further, it controls the deployment of money through its policy measures on Cash
Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), priority sector lending, export
refinancing, guidelines on investment assets etc.
Securities and Exchanges Board of India
The SEBI 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. The
regulation 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 investment, through its disclosure norms. SEBI also regulates the
Mutual Funds and the instruments in which these mutual funds can invest. Investment
from Foreign Institutional Investors (FIIs) also falls under the SEBIs scanner.
Other Regulators in the Indian Debt Market:
Apart from RBI and SEBI, there are several other regulators which are specific for
different classes of investors such as the Central Provident Fund Commissioner and the
Ministry of Labor to regulate the Provident Funds. Also, Religious and Charitable trusts
are regulated by the respective Government of the state in which these trusts are
located.