Study of Debt Market in India

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Black Book of Debt market Project
M.Com Banking and Insurance (University of Mumbai)
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A PROJECT REPORT ON
“STUDY OF DEBT MARKET IN INDIA”
Project submitted to
Master in commerce
Subject: project report
Submitted By
SHIVANI SANTOSH SINGH
ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND
COMMERCE
JOGESHWARI EAST MUMBAI – 400060
College seat no. 22SMAC6 year 2022-23
Exam seat no.____ year 2022-23
Under the guidance of
PROF. MOHAMED NISHAT SARFARAZ AHMED ANSARI
COMMERCE

lOMoARcPSD|33233814
A PROJECT REPORT ON
Project submitted to
Master in commerce
Subject: project report
Submitted By
COMMERCE
College seat no. 22SMAC6 year 2022-23
Exam seat no.____ year 2022-23
Under the guidance of
PROF. MOHAMED NISHAT SARFARAZ AHMED ANSARI
COMMERCE

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CERTIFICATE
This is to certify that MISS SHIVANI SANTOSH SINGH has worked and completed her project work for
the degree of MASTER IN COMMERCE in the faculty of commerce in the subject of ACCOUNTANCY on
project work entitled “STUDY OF DEBT MARKET IN INDIA ” under my supervision. It is her own work
and facts reported by her personal finding and investigation. Name and signature of guide date of submission.
Name and signature of guide Date of submission
Name & Signature of External
Name and signature of Professor in charge / H.O.D / principal of the institution
Stamp of the institute with date:

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DECLARATION
I the undersigned MISS SHIVANI SANTOSH SINGH here by, declare that this project work entitled
“STUDY OF DEBT MARKET IN INDIA” is a result of my own research work and has previously submitted
to any other university for any other examination.
I hereby further declare that all information of this document has obtained and presented in accordance with
academic rules and ethical conduct
College Seat no22SMAC6 Year 2022 – 2023

Exam Seat no. ___ Year 2022 – 2023
Date:
NAME AND SIGNATURE:

Place:
Research
Scholar

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Acknowledgement
To list who all have helped me is difficult because they are so numerous, and the depth
Is so enormous.
I would like to express my special thanks to my gratitude to my teacher
PROF. MOHAMMED NISHAT SARFARAZ AHEMAD ANSARI
As well as our principal DR. SWATI WAVHAL who give the golden
Opportunity to do this wonderful project on this topic
Also
Helped me doing a lot of research and I come to know about so many new things
And also thing providing me with all the facility that was required
I take this opportunity to thank the UNIVERSITY OF MUMBAI for
Providing fir giving me the chance to do this project
I am thankful to them
I am also thankful to all those people who helped me and guide me to
Make such a project
I would like to thank my guide PROF. MOHAMMED NISHAT SARFARAZ AHEMAD ANSARI
For providing this necessary this guidance in making of this project. I am also thankful to him for
Patiently and critically evaluating to content of this project.
I would like to take this opportunity to express my gratitude to all the M.COM STAFF AND STAFF OF THE
LIBRARY for their support.
DATE

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SELF INTRODUCTION
It’s my pleasure to introduce myself, I am SHIVANI SANTOSH SINGH
I study M.COM at ISMAIL YUSUF COLLEGE, JOGESHWARI EAST
I have worked on the topic “STUDY OF DEBT MARKET IN INDIA”
I would like to thank my guide PROF. MOHAMMED NISHAT

SARFARAZ AHEMAD ANSARI for providing me the necessary guidance
in making of this project.
I submitted my project (Black Book) and gave viva to my professor. I would

like to express my gratitude towards PROF. MOHAMMED
NISHATSARFARAZ AHEMAD ANSARI
I would like to take this opportunity to express my gratitude towards all

M.COM STAFF, STAFF OF LIBRARY and ALL MY FRIENDS for their
support to make this project successful.
NAME AND SIGNATURE OF STUDENT

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INDEX
CHAPTER TITLE OF CHAPTER PAGE
NO. NO.
COVER PAGE 1
TITLE PAGE 2
CERTIFICATE 3
DECLARATION BY STUDENTS 4
ACKNOWLEDGEMENT 5
SELF INTRODUCTION 6
INDEX 7
CHAPTER 1 INTRODUCTION 8-15
1.1 What Is Debt Market 16-16
1.2 Participants Of Debt Market 17-18
1.3 Instruments Of Debt 19-25
1.4 Types Of Bonds 25-27
1.5 Factors Which Influence Bond Prices 27-29
1.6 Process For Issuing Bonds 29-30
1.7 Bond Basics & Valuation of Bonds 30-32
1.8 Term Structure of Interest Rates 32-35
1.9 Market Structure of Debt Market 35-38
1.10 History Of the Indian Debt Market 38-39
1.11 Feature of debt market 39-42
1.12 Issue concerned with Indian debt market 43-44
1.13 Advantages of investing in debt instruments 44-45
1.14 Disadvantages of investing in debt instruments 45-46
1.15 Function of debt market 46-47
CHAPTER 2 RESEARCH AND METHODOLOGY 48
2.1 Objectives 49-50
2.2 Scope 51
2.3 Role Of State in Developing Debt Markets 51-64
2.4 Techniques Of Debt Market Management 64-67
2.5 Methodology Of Debt Market 67
2.6 Types of methodology of debt market 67-69
CHAPTER 3 LITERATURE REVIEW 70
3.1 Introduction 71-73
3.2 Importance Of Review of Literature 74-80
CHAPTER 4 DATA PRESENTATION AND DATA 81
ANALYSIS
4.1 Introduction 82-83
4.2 Result And Analysis 84-88
CHAPTER 5 CONCLUSION 89-88
CHAPTER 6 BIBLIOGRAPHY 89-93
CHAPTER 7 APPENDIX 99-119
THANK YOU 120

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CHAPTER 1
INTRODUCTION

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Bond market (also debt market or credit market) is a financial market where participants Bond market (also debt market
or credit market) is a financial market where participants as the secondary market. This is usually in the form of bonds,
but it may include notes, bills, and so on.
Its primary goal is to provide long-term funding for public and private expenditures. The bond market has
largely been dominated by the United States, which accounts for about 44% of the market. As of 2009, the
size of the worldwide bond market (total debt outstanding) is an estimated at $82.2 trillion of which the size
of the outstanding U.S. bond market debt was $31.2 trillion according to Bank for International Settlements
(BIS), or alternatively $35.2 trillion as of Q2 2011 according to Securities Industry and Financial Markets
Association (SIFMA).
The bond market is part of the credit market, with bank loans forming the other main component. The global
credit market in aggregate is about 3 times the size of the global equity market. Bank loans are not securities
under the Securities and Exchange Act, but bonds typically are and are therefore more highly regulated.
Bonds are typically not secured by collateral (although they can be), and are sold in relatively small
denominations of around $1,000 to $10,000. Unlike bank loans, bonds may be held by retail investors.
People have virtually unlimited wants, but the economic resources to produce those wants are limited.
Therefore, the greatest benefit of an economy is to provide the most desirable consumer goods and services in
the most desirable amounts— what is known as the efficient allocation of economic resources. To produce
these consumer goods and services requires capital in the form of labour, land, capital goods used to produce
a desired product or service, and entrepreneurial ability to use these resources together to the greatest
efficiency in producing what consumers want most. Real capital consists of the land, labour, tools and
machinery, and entrepreneurial ability to produce consumer goods and services, and to acquire real capital
costs money.
The financial system of an economy provides the means to collect money from the people who have it and
distribute it to those who can use it best. Hence, the efficient allocation of economic resources is achieved by
a financial system that allocates money to those people and for those purposes that will yield the greatest
return.
The financial system is composed of the products and services provided by financial institutions, which
includes banks, insurance companies, pension funds, organized exchanges, and the many other companies

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that serve to facilitate economic transactions. Virtually all economic transactions are effected by one or more
of these financial institutions. They create financial instruments, such as stocks and bonds, pay interest on
deposits, lend money to creditworthy borrowers, and create and maintain the payment systems of modern
economies.
The Indian debt market has traditionally been a wholesale market with participation restricted to few
institutional players – mainly banks. The banks were the major participants in the government securities
market due to statutory requirements. The turnover in the debt market too was quite low a few hundred crores
till the early 1990s. The debt market was fairly underdeveloped due to the administrated interest rate regime
and the availability of investment avenues which gave a higher rate of return to investors.
In the early 1990s, the government needed a large amount of money for investment in development and
infrastructure projects. The government realized the need of a vibrant, efficient and healthy debt market and
undertook reform measures. The Reserve Bank put in substantial efforts to develop the government securities
market but its two segments, the private corporate debt market and public sector undertaking bond market,
have not yet fully developed in terms of volume and liquidity.
It is debt market which can provide returns commensurate to the risk, a variety of instruments to match the
risk and liquidity preferences of investors, greater safety and lower volatility. Hence the debt market has a lot
of potential for growth in the future. The debt market is critical to the development of a developing country
like India which requires a large amount of capital for achieving industrial and infrastructure growth.
Regulation of Debt Market: The Reserve Bank of India regulates the government securities market and
money market while the corporate debt market comes under the purview of the Securities Exchange and
Board of India (SEBI).
In order to promote an orderly development of the market, the government issued a notification on March 2,
2000 delineating the areas of responsibility between the Reserve Bank and SEBI. The contracts for sale and
purchase of government securities, gold related securities, Money market securities and securities derived
from these securities and ready forward contracts in debt securities shall be regulated by the Reserve Bank.
Such contracts, if executed on the stock exchanges shall, however, be regulated by SEBI in manner that is
consistent with the guidelines issued by the Reserve Bank.
Once the stats have highlighted the significance, let us understand the debt market. The Debt Market is the
market where fixed income securities of various types and features are issue dan traded. Debt Market is
therefore; market for fixed income securities issued by Central and State Governments, Municipal
Corporations, Government bodies and commercial entities like Financial Institutions, Banks, Public Sector
Units, Public Ltd. Companies, Private Ltd.
Companies and also structured finance instruments. Fixed Income securities offer a predictable stream of
payments by way of interest and repayment of principal at the maturity of the instrument. Depending on the

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issuer of fixed income securities, it can be classified as Government Securities, i.e., bonds issued by the
Central /State Government of an economy, and Corporate Bonds, i.e., bonds issued by private and public
corporations. Debt instruments can also be categorised in terms of the immaturity, nature of interest, special
features embedded in it, etc. Short term debt instruments, issued by the Central Government and by
corporates, are respectively known as Treasury Bills and Commercial Papers. Similarly, securities issued with
a maturity of more than one year are known as date securities. The original maturity of dept. security may
range from 1 year to 30 years. The instruments with short term maturities or quasi-money instruments form
part of the money market. The Instruments traded in the money-market are Treasury Bills Certificates of
Deposits (CDs), Commercial Paper (CPs), Bills of Exchange, Call Money, Repo/Reverse Repo,
Collateralised Borrowing and Lending Obligation (CBLO) and other such instruments of short-term
maturities (i.e., not exceeding 1 year with regard to the original maturity). The other instruments with
maturity of more than 1 year form part of the debt market.
Debt market deals with those securities which yield fixed income group. The debt market is any market
situation where trading debt instruments take place. Examples of debt instruments include mortgages,
promissory notes, bonds, and Certificates of Deposit A debt market establishes a structured environment
where these types of debt can be traded with ease between interested parties.
 It issues fixed income financial instruments of various types and facilitates trading thereafter.
 Reduction in the borrowing cost of the Gov. and enable mobilization of resources at a reasonable cost.
 Provide greater funding avenues to public sector and private sectors projects and reduce the pressure on
institutional financing.
 Enhanced mobilization of resources by unlocking illiquid retail investment like gold.  Assist in the
development of a reliable yield curve.
 The debt market often goes by other names, based on the types of debt instruments that are traded.
 In the event that the market deals mainly with the trading of corporate bond issues, the debt market may be
known as a bond market.
 If mortgages and notes are the main focus of the trading, the debt market may be known as a credit market.
 When fixed rates are connected with the debt instruments, the market may be known as a fixed income
market.
Risks associated with debt market

Now that we have discussed the What, Who, How and Where of the debt market, let us understand the risks
associated with the debt market. From the earlier discussion we had concluded that effectively the debt
instruments issued in the market offer fixed or floating interest rate. With this understanding the investors
many times treat investment in a debt market security as a risk-free investment. However, the recent turmoil
in the debt market triggered by the securities of major players such as IL&FS, DHFL etc. was an eye opener
for all investors. Hence, it’s prudent to understand the risks associated with debt securities.
The following are the risks associated with debt securities:

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 Interest Rate Risk: The primary risk of investing in any debt security, irrespective of the nature of the
security, is the Interest Rate Risk. Price of a debt instrument is inversely related to the movement in
risk-free rate of interest, say yield of Government securities. Therefore, as and when interest rate
increases, the price of bond is expected to fall, leading to a loss for the holder of the security.
 Default Risk/Credit Risk: This can be defined as the risk that an issuer of a bond may be unable to
make timely payment of interest or principal on a debt security or to otherwise comply with the
provisions of a bond indenture and is also referred to as credit risk. Credit risk in bond investment
includes Credit Spread Risk and Default Risk. Credit spreads reflects the credit worthiness of
corporate borrowers, and depend upon the credit rating provided to the corporates by external rating
agencies. The value of a corporate bond not only depends upon the risk-free rate, but also on the
credit spread of respective securities. Poorer the credit quality of a corporate bond issuer as reflected
through a lower credit rating, greater would be the credit spread, leading to fall in bond price.
Therefore, credit spread risk is the risk of falling bond price due to migration of issuers’ credit rating
from higher to lower level, say from AAA to A, and therefore rise in risk premium.
 Reinvestment Rate Risk: This can be defined as the probability of a falling the interest rate resulting
in a lack of options to invest the interest received at regular intervals at higher rates at comparable
rates in the market.
The following are the risks associated with trading in debt securities:
 Counter Party Risk: is the normal risk associated with any transaction and refers to the failure or
inability of the opposite party to the contract to deliver either the promised security or the sale-value
at the time of settlement.
 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.
Liquidity Risk: Liquidity Risk is another type of risk that bond investors may face. Liquidity risk arises from
the illiquidity of a debt issue in the secondary bond market. In other words, whenever an investor fails to sell
a security at a fair price due to lack of sufficient demand, the market is said to be illiquid for that security, and
creates liquidity risk for the investors.
EVOLUTION:
In recent past local bodies such as municipal corporations have begun to tap Indian markets for funds. Now,
why for funds? Because the central government mobilizes funds mainly through issue of dated securities and
T-bills, while state governments rely solely on state development loans. To meet statutory requirements
banks, insurance companies and financial institutions invest. The gradual withdrawal of budgetary support to
PSUs by government since 1991 has increased their reliance on the bond market for mobilizing resources.
The Indian corporate sector relies, to a great extent, on raising capital through debt issues, which comprise of
bonds and CPs.
PRIMARY MARKET OF EVOLUTION

Primary market is that market where the debt instruments are issued for the first time . which can be issued as
follows:
Public Prospectus: invites to public buy.
Private Placement: invite few selected individuals, as the cost of public issuing is a quite large.

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Rights issue: the right issue is already exciting members, but they can refer to their beneficiaries in case of
unwillingness to buy.
SECONDARY MARKET OF EVOLUTION

Secondary market is where the debt instruments can be trade. It can take place by the following two ways
based on the characteristics of the investor and the structure of the market are:
Wholesale debt market segment of NSE & over the counter of BSE: where the investor are mostly banks,
financial instruments, RBI, primary dealers, insurance companies, provident funds, MFs, corporates and FIIS.
Retail debt market involves participation by individual investor, small trust and other legal entities in
addition to the wholesales investor’s classes.
EVOLVED: Now, bonds issues are being placed through private placement route, these bonds are structured
to suit the requirements of investors and issuers. Securitized products, corporate bond strips and variety of
floating rate instruments with floors and caps are innovations in corporate bond market.
Recently there is increase in insurance of corporate bonds with embedded put and call options. While some of
these are traded in stock market, the secondary market for corporate debt securities is yet to fully develop. It
also has a large non-securitized, transactions- based segment.
To reduce risk or to protect your capital, you need an asset class which performs the function of protecting
your capital from eroding or turning negative. Debt is a traditional asset class which existed even much
before ‘equity’ became popular and exciting as an asset class
Determined In the Debt Markets

The price of a bond in the Debt Markets is determined by the forces of demand and supply, as is the case in any market.
The price of a bond in the marketplace also depends on a number of other factors and fluctuates according to changes
in:
 Economic conditions
 General money market conditions 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
There is, however, a theoretical underpinning to the determination of the price of the bond in the market based on the
measure of the yield of the security.

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Indian Debt Market - Pillars of the Indian Economy

The Debt Market plays a very critical role for any growing economy which needs to employ a large amount
of capital and resources for achieving the desired industrial and financial growth. The Indian economy which
has grown at more than 7% p.a. in the last decade and is on the take off stage for double digit growth would
have to meet its resources requirements from a robust and an active debt market in India.
The Government Securities market, called 'G-Sec' market, is the oldest and the largest component of the
Indian debt market in terms of market capitalization, outstanding securities and trading volumes. The G-Secs
market plays a vital role in the Indian economy as it provides the benchmark for determining the level of
interest rates in the country through the yields on the government securities, which are referred to as the
Risk-free rate of return in any economy.
Besides G-Sec market, there is an active market for corporate debt papers in India which 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 and step up bonds.
Wholesale Debt Market Segment (WDM)
Government securities market, the largest and oldest component of Indian debt market, was a very active
segment on BSE since the beginning of the 19th century. Government papers were traded actively at BSE.
However, wholesale debt market segment for the government securities for institutional investors was further
introduced by BSE pursuant with following notifications issued by RBI.
 BOD. FSC. BC. No. 39 /24.76.002/2000 dated October 25, 2000.
 IDMC. PDRS. PDS. No PDS-2 /03.64.00/2000-01 dated November 13, 2000.
 DBS. FID No. C 10 / 01.08.00 / 2000-0122 dated November, 2000
The above notifications permitted Banks, Primary Dealers and Financial Institutions in India to undertake
transactions in debt instruments among themselves or with nonbank clients through the members of BSE
Limited. The Wholesale Debt Market Segment of BSE commenced its operations on June 15, 2001. All
existing cash market members of the Exchange who fulfill the net worth criteria of Rs. 30 Lacs are eligible
for
Wholesale Debt Market (WDM) membership.
Retail Debt Market Segment (RDM)

The Retail Debt Market, in the new millennium, presents a vast kaleidoscope of opportunities for the Indian
investor whose knowledge and participation hitherto has been restricted to the equity market. The
development of the Retail Debt Market has nagged the attention of policy makers, regulators and the
Government in the past few years. The potential of the Retail Debt Market can be gauged from the investor
Strength which is more than 40 million in the Indian equity market, has powered the tremendous growth and
transformation of the stock markets in recent times. Recognizing this opportunity at a very early stage, BSE

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has consistently been in the forefront of the campaign for the creation of a Retail Debt Market, and has
expounded the potential and need for retail trading in G-Secs in the past few years in various Important
forums and to the key regulatory authorities.
Emergence of Retail Debt Market

It would surprise many to know that a retail debt market was, at one point of time, very much present in
India. Right through the forties and fifties and until the early sixties, a good proportion of the holdings of
Government securities were concentrated in individual investors; available statistics indicate that more than
half of the holdings in Government securities were concentrated in retail investors in the early 50s.Today,
there exists an inherent need for households to diversify their investment portfolio so as to include various
debt instruments, including Government securities. Retail investors would have a natural preference for fixed
income returns and especially so in the current situation of increasing volatility in the financial markets. The
Government Securities (G-Secs) are the one of the best investment options for an individual investor today in
the financial markets due to the following factors:
 Zero default risk – because of their sovereign guarantee, they ensure total safety of all investments in
G-Secs.
 Lower average volatility in bond prices.
 Greater returns as compared to the conventional safe investment avenues, like Bank Deposits and
Fixed Deposits, though they also contain credit risk.
 Higher leverage -Greater borrowing capacity against G-Secs due to their zero risk Status.
 Wider range of innovations in the nature of securities, like T-Bills, Index linked Bonds, Partly Paid
Bonds and others, like STRIPS and securities with call and put options.
 Better and greater features to suit a large range of investment profiles and investor Requirements.
 Growing liquidity and an increased turnover in recent times in the Indian Debt Markets.
Indian Corporate Debt Market (ICDM)
Former Finance Minister Mr. P. Chidambaram, in his 2006 budget speech, had announced the intention of the
Government to create a single, unified exchange-traded market for corporate bonds in India. Subsequently,
the Securities and Exchange Board of India (SEBI) vide its circular, dated December 12, 2006, entrusted the
responsibility of setting up a reporting platform for all corporate debt transactions executed in the country to
BSE Limited. BSE developed a reporting platform - Indian Corporate Debt Market (ICDM) for reporting all
corporate deals done in respect of debt that is listed on any Indian stock exchange, are in demat form, and are
over Rs. 1 lakh in face value as prescribed by SEBI. The platform, implemented through Internet, called
ICDM, was being used by large over 400 participants, as on March 2010, in the Debt Market. On observing
wide participation and depth in the Corporate Bond market, SEBI vide its circular dated April 13, 2007,
granted permission to BSE to launch a trading platform. In compliance to the circular BSE launched the
platform with essential features of an Over the Counter (OTC) Market in July 2008. ICDM shall gradually
migrate into an anonymous order matching system.

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So, let’s first understand...
1.1What Is Debt Market

Simple terms, debt is an obligation or a commitment from the borrower to repay the money borrowed from
the lender on or before the expiration of the pre specified date on which the final payment falls due while
paying pre specified fixed return at regular intervals to the lender for the use of the money.
So how is debt investing different from equity investing?
When you invest your money via equities, as an investor you become part owner in the company issuing the
equity shares. With ownership you also enjoy voting right in the company while also get a share in company
future profits.
In case of debt, as an investor you become a lender to the borrowing company or issuer of debt security. In
the event of the company filing for bankruptcy, you would enjoy higher claim to the assets of the company as
a creditor, than as compared to a shareholder. However, as a debt investor you would not get voting rights or
shares in company’s future profits. Instead, you would be entitled to receive a pre specified rate of interest at
regular intervals, spread across the tenure of such loan. Unlike equities, debts are considered to be less risky
investments.
Companies usually raise money through debt for their short-term finance needs that’s the reason debt market
returns are less volatile than equity market returns, which makes it suitable for conservative investors looking
for preserving or protecting their capital or parking their near-term surplus.
Debt or bond holders enjoy superior claim to a company's assets in the case of liquidation of the company’s
assets. In this scenario, equity investors or shareholders are less likely to receive any compensation.
The debt market in India comprises mainly of two categories, fi restyle the government securities or the
Markets consisting of central government and state governments securities. The government to finance its
fiscal deficit the fixed income instruments and borrows by issuing G-Sec that are sovereign securities and are
issued by the Reserve Bank of India (RBI).
On behalf of Government of India. The second category comprises of the non-G-Sec markets i.e., the
corporate securities consisting of FI (financial institutions) bonds, PSU (public sector units) bonds and
corporate bonds/ debentures. The G-sec are the most dominant category of debt markets and form a major
part of the market in terms of outstanding issues, market capitalization and trading value. It sets a benchmark
for the rest of the market. The market for debt derivatives has not yet developed appreciably though a market
for OTC derivatives in interest rate products exists. Trends During 2008-09, the government and corporate
sector collectively mobilized Rs. 6,125,147 million (US $ 120,219 million) from primary debt market, a rise
of 64.54% as compared to the preceding year (Table 6-1). About 71.29% of the resources were raised by the
government (Central and State Governments), while the balance amount was mobilized by the corporate
sector through public and private placement issues. The turnover in secondary debt market during 2008- 09
aggregated Rs. 62,713,470 million (US $ 1,230,883 million), 11.01% higher than that in the previous year.
The share of NSE in total turnover in debt securities witnessed stood at 5.36 % during 2008-09.
The debt market in India is the financial marketplace where all debt instruments are bought and sold. When
we speak of debt instruments, we mean those securities that offer a fixed rate of return on your investment
and repayment of the principal amount. Consider the example of fixed deposits that give guaranteed
investment returns and are a part of the debt market.

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Thus, you can receive a secure income even in volatile markets when you invest in the debt market.
1.2 Participants of debt market
1. Central Governments
2. Reserve Bank of India
3. Primary Dealers
4. State Governments
5. Public Sector Units
6. Corporate treasuries
7. Public Sector Financial Institutions
8. Banks
9. Mutual Funds
10. Foreign Institutional Investors
11. Provident Funds
1. Central Governments:
Raising money through bond issuances, to fund Budgetary deficits and other short- and long-term funding
requirements.
2. Reserve Bank of India:
As investment banker to the government, raises funds for the government through bond and T-bill issues, and
participates in the market through open-market operations, in the course of conduct of monetary policy. The
RBI regulates the bank rates and repo rates and uses these rates as tools of its monetary policy. Changes in
these benchmark rates directly impact debt market.
3. Primary Dealers:
Who are market intermediaries appointed by the Reserve Bank of India who underwrite and make market in
government securities and have access to the call markets and repo markets for funds.
4. State Governments:
Municipalities and local bodies, which issue securities in the debt markets to fund their developmental
projects, as well as to finance their budgetary deficits.

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5. Public Sector Units:
Public sector are large issuers of debt securities, for raising funds to meet the long term and working capital
needs. These corporations are also investors in bonds issued in the debt markets.
6. Corporate treasuries:
Issue short- and long-term paper to meet the financial requirements of the corporate sector. They are also
investors in debt securities issued in the debt market
7. Public Sector Financial Institutions:
Regularly access debt markets with bonds for funding their financing requirements and working capital
needs. They also invest in bonds issued by other entities in the debt markets.
8. Banks:
Banks are the largest investors in the debt markets, particularly the treasury bond and bill markets. They have
a statutory requirement to hold a certain percentage of their deposits (currently the mandatory requirement is
25% of deposits) in approved securities (all government bonds qualify) to satisfy the statutory liquidity
requirements. Banks are very large participants in the call money and overnight markets. They are arrangers
of commercial paper issues of corporate. They are also active in the inter-bank term markets and repo markets
for their short-term funding requirements. Banks also issue CDs and bonds in the debt markets.
9. Mutual Funds:
Have emerged as another important player in the debt markets, owing primarily to the growing number of
bond funds that have mobilized significant amounts from the investors. Most mutual funds also have
specialized bond funds such gilt funds and liquid funds. Mutual Funds are not permitted to borrow funds,
except for very short-term liquidity requirements. Therefore, they participate in the debt markets pre-
dominantly as investors, and trade on their portfolios quite regularly.
10. Foreign Institutional Investors:
FIIs can invest in Government Securities up to US $ 5 billion and in Corporate Debt up to US $ 15 billion. A
foreign institutional investor is an investor in a financial market outside its official home country. Foreign
institutional investors can include pension funds, investment banks, hedge funds, and mutual funds. Some
countries place restrictions on the size of investments by foreign investors.
11. Provident Funds:
Are large investors in the bond markets, as the prudential regulations governing the deployment of the funds
they mobilize, mandate investments pre-dominantly in treasury and PSU bonds. They are, however, not very
active traders in their portfolio, as they are not permitted to sell their holdings,
unless they have a funding requirement that cannot be met through regular accruals and contributions.

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1.3 INSTRUMENTS OF DEBT
SCHEDULE:
MONEY
PARTICULAR BONDS MARKET
INSTRUMENTS
Bank 1800 430
Mortgage institution 1790 0
Other MFI 590 240
Government 1150 150
Local government 175 30
Non-financial and other 980 80
Total 6485 930
Debt instruments
A debt instrument is any form of arrangement that is essentially categorized as debt. Debt instruments give
money to a company that pledges to pay it back over time.
Debt is a legal responsibility on the side of the issuer (or taker) to return the lender the borrowed amount plus
interest on a timely basis. A debt instrument can be printed or stored electronically. Debt instruments include
bonds, debentures, leases, certificates, bills of exchange, and promissory notes.

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These debt instruments also allow market players to shift debt liability ownership from one person to another.
Throughout the life of the instrument, the lender receives a specified amount of money as a form of interest.
Short term instruments:
1. Call/Notice Money.
2. Term Money.
3. Repo.
4. CBLO (Collateral Borrowing &Lending Obligation).
5. Treasury Bills.
6. Fixed deposit.
7. Certificates of Deposits.
8. Commercial Paper.
9. Bills Re discounting schemes.
10. Bonds
11. Debenture
1. Call / Notice Money

It is an important segment of the Indian money market. In this market, banks and primary dealers borrow and
lend funds to each other on unsecured basis. If the period is more than 1 day and up to 14 days it is called as
“Notice money”.
Money lent for 15 days to 1 year is called
2. Term money
No brokers. Settlement is done between the participants through the current accounts maintained with the
RBI. In general, the call money rate, referred to as the Overnights.
3. Repo
Repurchase agreements are contracts for the sale and future repurchase of a financial asset, most often
sovereign securities on the termination date, the seller repurchases the asset at the price agreed at inception of
the repo. The difference between the sale and repurchase prices represents interest for the use of the funds. A

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repo is essentially a short-term interest-bearing loan against collateral. A repo transaction for the borrower is
a “reverse repo” transaction for the lender.
4. Collateralized Borrowing and Lending Obligation (CBLO)

As an alternative to the call money market, CCIL has developed CBLO, a money market instrument
recognized by RBI. An instrument issued at a discount and in electronic book entry form, for initial maturities
ranging from one day to one-year CBLO rates are generally comparable to market repo rates, both being
secured transactions.
5. Treasury Bills
Promissory notes of the central government and therefore qualify as being free of credit risks. Issued to meet
short term funding requirements of the government account with Reserve Bank. Sale is by auction. Any
individual, corporate, bank, primary dealer or other entity is free to buy T-Bill. Denominations of 91, 182 and
364 days. A Treasury bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury
Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000.
However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities
are widely regarded as low-risk and secure investments.
6.Fixed deposit
A fixed deposit is financial product offered by bank and non-banking financial corporations that pays a higher
rate a invest to investors than a typical saving account.
When an account holder make a fixed deposit, the amount of profit or interest earned on the investment
predetermined. Irrespective of changes in interest rates, the rate will not grow or reduce at any moment.
Fixed deposits can range from one week to ten years in length. Fixed deposits cannot be cashed before their
expiration date. To put it another way, money cannot be withdrawn for any reason until the deposit's time
limit has passed. The bank may levy an early withdrawal penalty or fee if the money is withdrawn too soon.
7. Certificate of Deposit (CD)
A specific time deposit is a CD (certificates of deposit). Banks, thrift institutions, and community banks all
provide these debt instruments to customers. Certificates of Deposit are equivalent to conventional bank
savings accounts.
They are covered by insurance and are nearly risk-free. CDs differ from savings accounts in that they have a
set term (typically 3 months, 6 months, or 1 to 5 years) and, in most cases, a fixed interest rate. CDs can be
issued for a duration of not less than one year and not more than three years from the date of release.
All-India Financial Institutions and Scheduled Commercial Banks can both issue bonds. CDs issued by banks
shall have a maturity duration of no less than 7 days and no more than one year.
Similar to CPs except that the issuer is a bank. Minimum amount of a CD can be Rs. 1 lakh and maturity
between 7 days and 1 year. Financial Institutions can issue CDs only for maturities between 1 and 3 years. No
premature cancellation of CD is allowed.

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8.Commercial Paper (CP)
Corporate, primary dealers & All-India Financial Institutions (FIs) can issue CP Promissory notes issued by
the corporate sector for raising short term funds. Sold at a discount to face value. Maturity can range between
a minimum of 7 days and a maximum of 1 year. CPs are required to be rated and the minimum rating
eligibility.
Commercial paper, often known as CP, is a short-term financial instrument used by businesses to raise capital
over a one-year period. It is an unprotected form of debt instrument that is issued as a promissory note and
was first launched in India in 1990.
CPs have a seven-day minimum maturity period of time and a maximum maturity period of one year from the
date of issue. The maturity date of the debt instrument, on the other hand, should normally not exceed the
date up to which the borrower's credit rating is applicable. They are available in amounts of Rs 5 lakh or
multiples of that value.
P2. • Every CP issue has an Issuing and Paying Agent (IPA), which has to be scheduled bank. Stamp duty is
currently payable on CP issues, depending on the maturity and who the initial buyer is.
9.Bills Rediscounting Scheme
The RBI introduced the Bills Market Scheme (BMS) in 1952 which was later modified into the New Bills
Market Scheme (NBMS). • Under this scheme commercial banks can rediscount the bills which were
originally discounted by them with approved institutions (viz., Commercial Banks, Development Financial
Institutions, Mutual Funds, Primary Dealers etc.)
10.Bonds
The term bond suggests that someone owes money to another person. In these, an investor puts
money into corporate or government assets in exchange for a fixed rate of return. If a firm wants to expand its
operations, it might procure money from private investors.
Corporate bonds are a sort of financial security that a company may use to raise money from the general
public. Individual people with brokerage access may be prepared to invest in corporate bond approval as
well. Companies, governments, municipalities, states, etc. can use bonds.
Organizational mutual fund investors are strategically among the most significant corporate bond investors,
but individuals with brokerage access may have the opportunity to invest in corporate bond issuance as well.
Individual and institutional investors use the dynamic secondary market for corporate bonds.
Long term instruments:
1. Government of India dated securities (GOISECs).
2. Inflation linked bonds Zero coupon bonds.
3. State government securities (state loans).
4. Public Sector Undertaking Bonds (PSU Bonds).

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5. Corporate debentures.
6. Bonds of Public Financial Institutions (PFIs).
1. Government of India dated securities (GOISECs)
GOISECs are issued by the Reserve Bank of India on behalf of the Government of India. These form a part of
the borrowing program approved by Parliament in the Finance Bill each year (Union Budget).
• They have maturity ranging from 1 year to 30 years.
• GOISECs are issued through the auction route. The RBI pre specifies an approximate amount of dated
securities that it intends to issue through the year.
2. Inflation linked bonds Zero coupon bonds.
These are bonds for which the coupon payment in a particular period is linked to the inflation rate at that
time the base coupon rate is fixed with the inflation rate (consumer price index-CPI) being added to it to
arrive at the total coupon rate.
Investors are often loath to invest in longer dated securities due to uncertainty of future interest rates. The
idea behind these bonds is to make them attractive to investors by removing the uncertainty of future inflation
rates, thereby maintaining the real value of their invested capital.
Zero coupon bonds.
These are bonds for which there is no coupon payment. They are issued at a discount to face value with the Is
count providing the implicit interest payment. In effect, these can be construed as long duration T - Bills or as
bonds with cumulative interest payment.
3. State government securities (state loans).
These are issued by the respective state governments but the RBI coordinates the actual process of selling
these securities. Each state is allowed to issue securities up to a certain limit each year. State Government
issue such securities to fund their developmental projects and finance their budgetary deficits.
4. Public Sector Undertaking Bonds (PSU Bonds).
These are long term debt instruments issued by Public Sector Undertakings (PSUs). The term usually denotes
bonds issued by the central PSUs (i.e., PSUs funded by and under the administrative control of the
Government of India). The issuance of these bonds began in a big way in the late eighties when the central
government stopped/reduced funding to PSUs through the general budget. Typically, they have maturities
ranging between 5-10 years and they are issued in denominations (face value) of Rs.1,000 each. Most of
these issues are made on a private placement basis to a targeted investor base at market determined interest
These PSU bonds are transferable by endorsement and delivery and no taxis deductible at source on the
interest coupons payable to the investor (TDS exempt).

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5. Corporate debentures.
A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have
no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both
corporations and governments frequently issue debentures to raise capital or fund.
Understanding Debentures
Similar to most bonds, debentures may pay periodic interest payments called coupon payments. Like other
types of bonds, debentures are documented in an indenture. An indenture is a legal and binding contract
between bond issuers and bondholder. The contract specifies features of a debt offering, such as the maturity
date, the timing of interest or coupon payments, the method of interest calculation, and other features.
Corporations and governments can issue debentures.
Governments typically issue long-term bonds—those with maturities of longer than 10 years. Considered
low-risk investments, these government bonds have the backing of the government issuer.
6. Bonds of Public Financial Institutions (PFIs).
A part from public sector undertakings, Financial Institutions are also allowed to issue
bonds, that too in much higher quantum. They issue bonds in 2 ways – through public issues targeted at retail
investors and trusts and also through private placements to large institutional investors. Usually, transfers of
the former type of bonds are exempt from stamp duty while only part of the bonds issued privately have this
facility. On an incremental basis, bonds of PFIs are second only to GOISECs in value of issuance.
Corporate debentures
These are long term debt instruments issued by private sector companies. These are issued in denominations
as low as Rs.1,000 and have maturities ranging between one and ten years. Long maturity debentures are
rarely issued, as investors are not comfortable with such maturities.
Generally, debentures are less liquid as compared to PSU bonds and the liquidity is inversely proportional to
the residual maturity. A key feature that distinguishes debentures from bonds is the stamp duty payment.
Debenture stamp duty is a state subject and the quantum of incidence varies from state to state. There are two
kinds of stamp duties levied on debentures viz. issuance and transfer. Issuance stamp duty is paid in the state
where the principal mortgage deed is registered. Over the years, issuance stamp duties have been coming
down and are reasonably uniform. Stamp duty on transfer is paid to the state in which the registered office of
the company is located. Transfer stamp duty remains high in many states and is probably the biggest deterrent
for trading in debentures resulting in lack of liquidity.
Benefits of debt instruments
1. Debt instruments offer stable and greater yields than bank fixed deposits, providing them an advantage.
2. Debt instruments can be either long-term or short-term in length. Short term debt instruments generate
revenue that must be returned within a year. Long-term debt instruments, on the other hand, are those that are
payable over a period of a year or more.

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3. Short-term debt instruments include credit card bills and Treasury notes, whilst long-term debt instruments
include long-term loans and mortgages. Interest rate adjustments have a greater impact on the value of long-
term debts.
4. Debt instruments can be issued by the government, municipalities, a variety of institutions, and enterprises
and are extremely crucial for raising capital. The debt market is responsible for capitalizing and mobilizing
cash in the economy.
5. Debt instruments market provides a venue for the government, businesses, and other organizations to
generate funding. Raising stock can be expensive for a company at times.
1.4 TYPES OF BONDS

1. Fixed-rate bonds
2. Floating-rate bonds
3. Perpetual bonds
4. Convertible Bonds
5. Callable Bonds
6. Put table Bonds
7. Subordinated Bonds
8. Bearer Bonds
9. Climate Bonds
10. Serial Bonds
1. Fixed-rate bonds
Fixed-rate bonds pay consistent interest amounts until maturity. The bondholders earn predictable and
guaranteed returns regardless of the prevailing market conditions. For example, an investor purchased a ten-
year fixed-rate government bond of Rs. 1000, issued on 20th April 2013 which offers a coupon rate of 7.5%.
The investor will get a fixed interest of Rs. 75, annually every April, till 20th April 2023. A fixed rate bond
(or fixed term deposit) is a savings account that you can put money into for a set period of time. It's usually 1,
2 or 3 years, but can also be as long as 5 years.
2. Floating-rate bonds
Floating-rate bonds do not pay fixed returns each period. Instead, the interest rates vary, depending on the set
benchmark, during the tenure.

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For example, an investor purchased an 8-year floating rate bond issued in 2015. The bond pays interest of 40
points higher than the prevailing National Savings Certificate interest rate. This means the NSC interest rate
is the benchmark and any fluctuation in it directly affects the coupon payment of this bond.
3. Perpetual bonds
Perpetual bonds are those debt securities which do not have a maturity. In this type of bond, the issuer does
not repay the principal amount to the bondholders. Though, they keep paying steady coupon payments to the
bondholders till perpetuity.
4. Convertible Bonds
The investors holding convertible bonds get the right to convert the bond to a predefined number of equity
shares in the issuing company at a particular time from the tenure. Though, the investor can also opt to
receive the principal repayment at the maturity, if they don’t want to exchange it with shares.
5. Callable Bonds
Callable bonds are high coupon paying securities that give the issuer the right to call back the bonds at a pre-
agreed price and date. A callable bond, also known as a redeemable bond, is a bond that the issuer may
redeem before it reaches the stated maturity date. A callable bond allows the issuing company to pay off
their debt early. A business may choose to call their bond if market interest rates move lower, which will
allow them to re-borrow at a more beneficial rate. Callable bonds thus compensate investors for that
potentiality as they typically offer a more attractive interest rate or coupon rate due to their callable nature.
6. Put table Bonds
Put table bonds give the bondholder the right to return the bond and ask for repayment of principal at a pre-
agreed date before maturity. Since the benefit offered is for investors, these bonds pay lower returns. A put
bond is a debt instrument that allows the bondholder to force the issuer to repurchase the security at
specified dates before maturity. The repurchase price is set at the time of issue and is usually at par
value (the face value of the bond).
7. Subordinated Bonds
Bonds which are given less priority as compared to other bonds of the company in cases of a close down are
called subordinated bonds. In cases of liquidation, subordinated bonds are given less importance as compared
to senior bonds which are paid first. A subordinated bond is a bond which in case of a debtor's bankruptcy is
paid after the payment of other higher priority bonds, the so-called senior unsubordinated bonds.
Subordinated bonds are unsecured and therefore riskier than older ones.
8. Bearer Bonds
Bearer Bonds do not carry the name of the bond holder and anyone who possesses the bond certificate can
claim the amount. If the bond certificate gets stolen or misplaced by the bond holder, anyone else with the
paper can claim the bond amount. A bearer bond is a fixed-income security that is owned by the holder, or
bearer, rather than by a registered owner. The coupons for interest payments are physically attached to the
security. The bondholder is required to submit the coupons to a bank for payment and then redeem the
physical certificate when the bond reaches the maturity date.
Bearer bonds are virtually extinct in the U.S. and some other countries as the lack of registration made them
ideal for use in money laundering, tax evasion, and any number of other under-handed transactions. They
also are vulnerable to theft.
9. Climate Bond
Climate Bonds are issued by any government to raise funds when the country concerned faces any adverse
changes in climatic conditions. is an international organization working to mobiliser global capital for climate

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action. We achieve this through the development of the Climate Bonds Standard and Certification Scheme,
Policy Engagement and Market Intelligence work. We empower our Partner organizations with the tools and
knowledge needed to navigate, influence and instigate change.
10. Serial Bonds
A serial bond is a bond issue that is structured so that a portion of the outstanding bonds mature at regular
intervals until all of the bonds have matured. Because the bonds mature gradually over a period of years,
these bonds are used to finance projects that provide a consistent income stream for bond repayment. The
entire bond issue is sold to the public on the same date, and the maturity dates are stated in the offering
documents. Bonds maturing over a period in installments are called serial bonds.
Understanding Serial Bonds
If an issuer reduces the dollar amount of bonds outstanding, it reduces the risk that the issuer misses a principal
repayment or interest payment and defaults on the bond issue. While a serial bond issue requires the issuer to repay
specific bondholders on a stated date, other bond issues are structured with a sinking fund.
A serial bond structure is a common strategy for municipal revenue bonds because these bonds are issued
for fee-generating projects built by states and cities. Assume, for example, that a city builds a sports stadium
that is funded with parking fees, stadium concession income, and lease income. If the bond issuer believes
that the facility can generate income consistently each year, it can structure the bond for serial maturity
dates. As the total amount of bonds outstanding decreases, the future risk on the bond issue defaulting also
declines.
1.5 Factors which influence bond prices

1. Demand and Supply situation
2. Balance of payments
3. Foreign exchange rate
4. Interest rates in other countries
5. Levels of government spending
6. Inflation figures
7. Money supply figures
8. Government economic policy
9. Interest Rate target of RBI
10. Credit ratings
1. Demand and Supply situation
Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is
the amount of a product people are willing to buy at a certain price; the relationship between price and
quantity demanded is known as the demand relationship. Supply represents how much the market can offer.
2. Balance of payments

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The balance of payments, also known as balance of international payments, encompasses all transactions
between a country’ s residents and its nonresidents involving goods, services and income; financial claims on
and liabilities to the rest of
The world; and transfers such as gifts. The balance of payments classifies these Transactions in two accounts –
the current account and the capital account. The current account includes transactions in goods, services, investment
income and current transfers, while the capital account mainly includes transactions in financial instruments.
3. Foreign exchange rate

In finance, an exchange rate (also known as a foreign-exchange rate, forex rate, ER, FX rate or Agio)
between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as
the value of one country’ s currency in relation to another currency.[1] For example, an interbank exchange
rate of 119 Japanese yen (JPY, ¥) to the United States dollar (US$) means that ¥119 will be exchanged for
each US$1 or that US$1 will be exchanged for each ¥119. In this case it is said that the price of a dollar in
relation to yen is ¥119, or equivalently that the price of a yen in relation to dollars is $1/119.
4. Interest rates in other countries
The percentage of the value of a balance or debt that one pays or is paid each time period. For example, if one
holds a bond with a face value of $1,000 and a 3% interest rate payable each quarter, one receives $30 each
quarter. The percentage of the interest rate remains constant (usually), but the amount one pays or is paid
changes according to the amount of the balance or debt. For example, if one pays off part of the principal on a
loan each month, the amount one pays in interest decreases even though the rate remains the same. See also:
Time Value of Money.
5. Levels of government spending

Government spending or expenditure includes all government consumption, investment, and transfer payments.
In national income accounting the acquisition by governments of goods and services for current use, to
directly satisfy the individual or collective needs of the community, is classed as government final
consumption expenditure. Government acquisition of goods and services intended to create future benefits,
such as infrastructure investment or research spending, is classed as government investment (government
gross capital formation). These two types of government spending, on final consumption and on gross capital
formation, together constitute one of the major components of gross domestic product.
6. Inflation figures
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the
purchasing power of currency is falling. Central banks attempt to limit inflation, and avoid deflation, in order
to keep the economy running smoothly.
7. Money supply figures
In economics, the money supply or money stock, is the total amount of monetary assets available in an
economy at a specific time. There are several ways to define "money", but standard measures usually include
currency in circulation and demand deposits (depositors' easily accessed assets on the books of financial
institutions). Money supply data are recorded and published, usually by the government or the central bank of
the country. Public and private sector analysts have long monitored changes in money supply because of the
belief that it affects the price level, inflation, the exchange rate and the business cycle.
8. Government economic policy

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Economic policy refers to the actions that governments take in the economic field. It covers the systems for
setting levels of taxation, government budgets, the money supply and interest rates as well as the labor
market, national ownership, and many other areas of government interventions into the economy. Most
factors of economic policy can be divided into either fiscal policy, which deals with government actions
regarding taxation and spending, or monetary policy, which deals with central banking actions regarding the
money supply and interest rates.
Such policies are often influenced by international institutions like the International Monetary Fund or World
Bank as well as political beliefs and the consequent policies of parties.
9. Interest Rate target of RBI

Bank rate, also referred to as the discount rate in American English, is the rate of interest which a central
bank charges on the loans and advances to a commercial bank. The bank rate is known by a number of
different terms depending on the country and has changed over time in some countries as the mechanism used
to manage the rate have changed. Whenever a bank has a shortage of funds, they can typically borrow from
the central bank based on the monetary policy of the country. The borrowing is commonly done via repos,
where the repo rate is the rate at which the central bank lends short-term money to the more expensive. It is
more applicable when there is a liquidity crunch in the market.
In contrast the reverse repo rate is the rate at which banks can park surplus funds with reserve bank. This is
mostly done when there is surplus liquidity in the market as a high reverse repo rate will make it attractive to
banks to park surplus funds with the central bank.
10. Credit ratings

Credit rating agencies assign credit ratings to bond issuers and to specific bonds. A credit rating can provide
information about an issuer’s ability to make interest payments and repay the principal on a bond. In general,
the higher the credit rating, the more likely an issuer is to meet its payment obligations – at least in the
opinion of the rating agency. If the issuer’s credit rating goes up, the price of its bonds will rise. If the rating
goes down, it will drive their bond prices lower.
1.6 Process for Issuing Bonds
Step 1: TATA Company needs capital to purchase a new piece of equipment for its operations. The company
meets with financial advisors and investment bankers to discuss the possibilities of raising the necessary
capital. They decide that a bond issue is the least expensive method for the company. The process is as
follows:
Tata Company sets the maturity date and face value of the bonds. The bonds will have a maturity date of ten
years from the date of issue and a face value of Rs.1,000. The company will issue as many bonds as it needs
for the equipment purchase – if the equipment costs Rs.10,000,000 fully installed, then the company will
issue10,000 bonds.
Step 2: Investment bankers set the coupon rate for the bonds. The investment bankers attempt to gauge the
interest rate environment and set the coupon rate commensurate with other bonds with similar risk and
maturity. The coupon rate dictates whether the bonds will be sold in the secondary market at face value or at a
discount or premium. If the coupon rate is higher than the prevailing interest rate, the bonds will sell at a
premium if the coupon rate is lower than the prevailing interest rate, the bonds will sell at a discount.

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Step 3: Investment bankers find investors for the bonds and issue them in the primary market. The
investment bankers use their system of brokers and dealers to find investors to buy the bonds. When
investment bankers complete the sale of the bonds to investors, they turn over the proceeds of the sale (less
the fees for performing their services) to the company to use for the purchase of equipment. The total face
value of the bonds appears as a liability on the company's balance sheet.
Step 4: The bonds become available in the secondary market. Once the bonds are sold in the primary
market to investors, they become available for purchase or sale in the secondary market. These transactions
usually take place between two investors – one investor who owns bonds that are no longer needed for his/her
Investment portfolio and another investor who needs those same.
Debt market comparing with Equity market
BASIS FOR COMPARISON DEBT EQUITY
Meaning Funds owed by the Funds raised by the

company towards another company by issuing
party is known as Debt. shares is known as
Equity.
What is it? Loan funds Own funds
Reflects Obligation Ownership
Term Comparatively short term Long term
Status of holders Lenders Proprietors
Risk Less High
Types Term loans, debentures, Shares and Stocks
bonds, etc.
Return Interest Dividend
Nature of return Fixed and regular Variable and irregular
Collateral Essential to loan, but funds Not required
can be raised otherwise
also.
1.7 Bond Basics & Valuation of Bonds
Bonds represent loans by investors to a company. In a bond contract, the investor purchases a certificate from
the issuer in exchange for a stream of interest payments and the return of a principal amount at the end of the
Contract. In this section we will discuss the terminology of the bond market and the methodology for
calculating the price (present value) of a bond.
Bond Terminology:
There are several terms that are commonly used by investors and issuers when dealing with bonds.
Coupon

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The periodic interest payment made by the issuer. When bonds were first developed, the bond certificate had
detachable coupons that the investor would send to the issuer to receive each interest payment. The term still
Applies to payments, even though coupons are no longer used to redeem them.
Coupon rate
The interest rate used to calculate the coupon amount the bond will pay. This rate is multiplied by the face
value of the bond to arrive at the coupon amount.
Face (par) value:
The amount printed on the certificate. The face value represents the principal in the loan agreement, which is
the amount the issuer pays at maturity of the bond.
Maturity date:
The date the loan contract ends. At this time, the issuer pays the face value to the investor who owns the
bond. Bonds are often referred to as fixed income securities. because they have a fixed payout to the investor.
Since the coupon rate is set before he sale of the bond, the investor knows the amount of the interest
payments.
Price Interest rate relationship:
The price of a government security is inversely related to the market interest rate. As the interest rate increase
Price decreases and therefore, the yield increases. However, if the interest rates fall the G-Sec become
expensive and therefore, the yield falls.
Therefore, if the market price is equal to face value of the government security, then the current yield, coupon
yield and Yield to maturity will all be equal to the coupon rate or interest payable on government security.
Coupon rate = Yield to maturity if, Market price = Face value
If Market Price is less than the face value of the government security the current yield and yield to maturity
will be higher than the coupon yield than the coupon rate.
Coupon rate < Yield to maturity if, Market price < Face value
In cases where the market price of the government security/bond is more than its face value the current yield
and Yield to maturity will be lower than the coupon rate.
Coupon rate > Yield to maturity if, Market price > Face value
Average Maturity:
Average Maturity is the weighted Average of the maturities of all the instruments in a portfolio
Duration:

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is the measure we use to estimate the average maturity of a bond's cash flows. It represents the weighted
average life of the bond, where the weights are based on the present value of the individual cash flows
relative to the present value of the total cash flows (current price of the bond).
Duration measures the sensitivity of a bond’ s or portfolio’ s, price to changes in interest rates. - A three-year
duration portfolio will approximately rise (fall) 3% if interest rates fall (rise) by100 bps (1%)- A six-year
duration portfolio will rise (fall) 6% if interest rates fall (rise) by 100 bps (1%)
Relation of Duration with Maturity Date, YTM and Coupon Rate
A bond's duration generally increases with the time to maturity, holding the coupon rate constant.
The duration of a coupon bond is higher when the bond's yield to maturity is lower. The higher the coupon
rate, the lower the duration.
1.8 Term Structure of Interest Rates
There are five main patterns created by the term structure of interest rates:
1. Normal yield curves

2. Flat yield curves
3. Inverted Yield Curve
4. Steep yield curves
5. Humped yield curves
1 Normal Yield Curve:
Remember that as general current interest rates increase, the price of a bond will decrease and its yield will
increase. This is the most common shape for the curve and, therefore, is referred to as the normal curve. The
normal yield curve reflects higher interest rates for 30-year bonds as opposed to 10-year bonds. If you think
about it intuitively, if you are lending your money for a longer period of time, you expect to earn a higher
compensation for that.
2 Flat Yield Curve:
Sends mixed signal that short-term interest rates will rise and other signals that long-term interest rates will
fall. A flat curve happens when all maturities have similar yields. This means that the yield of a 10-year bond
is essentially the same as that of a 30-year bond. A flattening of the yield curve usually occurs when there is a
transition between the normal yield curve and the inverted yield curve.
3 Inverted Yield Curve:

The inverted yield curve indicates that the market currently expects interest rates to decline as time moves
father into the future, which in turn means the market expects yields of long-term bonds to decline.
Remember,

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Also, that as interest rates decrease, bond prices increase and yields decline.
An inverted curve appears when long-term yields fall below short-term yield. An inverted yield curve occurs
due to the perception of long-term investors that interest rates will decline in the future. This can happen for a
number of reasons, but one of the main reasons is the expectation of a decline in inflation.
When the yield curve starts to shift toward an inverted shape, it is perceived as a leading indicator of an
economic downturn. Such interest rate changes have historically reflected the market sentiment and
expectations of the economy.
4. Steep yield curves
A steep curve indicates that long-term yields are rising at a faster rate than short-term yields. Steep yield
curves have historically indicated the start of an expansionary economic period. Both the normal and steep
curves are based on the same general market conditions. The only difference is that a steeper curve reflects a
larger difference between short-term and long-term return expectations.
5. Humped yield curves
A humped yield curve occurs when medium-term yields are greater than both short-term yields and long-term
yields. A humped curve is rare and typically indicates a slowing of economic growth. The shape of the curve
provides the analyst-investor with insights into the future expectations for interest rates, as well as a possible
increase or decrease in macroeconomic activity. The shape of the yield curve can take on various forms, one
of which is a humped curve.
The Credit Spread

The credit spread, or quality spread, is the additional yield an investor receives for acquiring a corporate
bond instead of a similar federal instrument.
When inflation rates are increasing (or the economy is contracting) the credit spread between corporate and
Treasury securities widens. This is because investors must be offered additional compensation (in the form of
a higher coupon rate) for acquiring the higher risk associated with corporate bonds.
When interest rates are declining (or the economy is expanding), the credit spread between Federal and
corporate fixed-income securities generally narrows. The lower interest rates give companies an opportunity
to borrow money at lower rates, which allows them to expand their operations and also their cash flows.
When interest rates are declining, the economy is expanding in the long run, so the risk associated with
investing in a long-term corporate bond is also generally lower.
Yield Curve Analysis
Yield curve, in economies and finance, a curve that shows the interest rate associated with different contract
lengths for a particular debt instrument (e.g., a treasury bill). It summarizes the relationship between the term
(Time to maturity) of the debt and the interest rate (yield) associated with that term.
Yield Curve theory
1. Pure expectations theory

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Argues that yields differ with maturities because of market expectations of future changes in interest rates. -
For example, the 2-year yield is higher than the 1-year yield because the expectations about the 1-year yield
1-year from now, is factored in the 2-year yield is ruling now.
2. Liquidity preference theory
If YTMs were equal across maturities, investors will prefer shorter maturity bonds because longer the
maturity, greater the uncertainties, about the future inflation and interest rates.- As compensation for the
higher uncertainties, investors demand a higher yield (or liquidity premium) to invest in longer term
securities.-Weakness of the theory is that, on first principles, liquidity premium should go up with maturity
3. Market Segmentation Theory
Different investors in different maturity segments, depending on their maturity preference and asset liability
management needs, and the yields are independent of each other. Market segmentation theory is a theory that
long and short-term interest rates are not related to each other. It also states that the prevailing interest rates
for short, intermediate, and long-term bonds should be viewed separately like items in different markets for
debt securities.
WDM Products and Services
Zero Coupon Yield Curve
Keeping in mind the requirements of the banking industry, financial institutions, mutual funds, insurance
companies, that have substantial investment in sovereign papers, NSE disseminates a ‘Zero Coupon Yield
Curve’ (NSE Zero Curve) to help in valuation of securities across all maturities irrespective of its liquidity in
the market. This product has been developed by using Nelson-Siegel model to estimate the term structure of
interest rate at any given point of time and been successfully tested by using daily WDM trades data. This is
being disseminated daily.
The ZCYC depicts the relationship between interest rates in the economy and the associated terms to
maturity. It provides daily estimates of the term structure of interest rates using information on secondary
market trades in government securities from the WDM segment. The term structure forms the basis for the
valuation of all fi xed income instruments. Modelled as a series of cash flows due at different points of time
in the future, the underlying price of such an instrument is calculated as the net present value of the stream of
cash flows. Each cash flow, in such a formulation, is discounted using the interest rate for the associated term
to maturity; the appropriate rates are read off the estimated ZCYC. Once estimated, the interest rate-maturity
mapping is used to compute underlying valuations even for securities that do not trade on a given day. The
daily ZCYC captures the changes in term structure, and is used to track the value of portfolios of government
securities on a day-to-day basis. The estimates of daily ZCYC are available from February 1998. (Chart 6-6)
plots the spot interest rates at different maturities for the period April 2008 till June 2009.
Yield to Maturity computed
The calculation for YTM is based on the coupon rate, length of time to maturity, and market price. It is the
Internal Rate of Return on the bond and can be determined by equating the sum of the cash-flows throughout
the life of the bond to zero. A critical assumption underlying the YTM is that the coupon interest paid over
the life of the bond is assumed to be reinvested at the same rate.

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The YTM is basically obtained through a trial-and-error method by determining the value of the entire range
of cash-flows for the possible range of YTMs so as to find one rate at which the cash-flows sum up to zero.
So, say, a G-Sec - 8.00% GOI Loan 2014 with only 2 cash flows remaining to maturity as under:
Maturity Date: 30th January 2014
Interest Payment Dates: 30th January, 30th July and trading currently at Rs. 115 for 1 Unit will have a YTM
as follows:
Settlement Date: 17th March 2013 (Date at which ownership is transferred to the Buyer)
Frequency of Interest Payments: 2 Day Count Convention: 30/360 (which in MS- EXCEL is taken as Basis 4)
Yield To Maturity: 4.8626%
The same can be computed from MS-EXCEL through the YIELD Formula by input of the parameters given
above. It can be checked by discounting the said cash-flows, i.e., the two coupons of Rs. 8.00 each and the
principal repayment of Rs.100/- from the interest payment dates and maturity dates to the date of settlement.
Yield related to the price
Yields and Bond Prices are inversely related. So, a rise in price will decrease the yield and a fall in the bond
price will increase the yield.
There will be an immediate and mostly predictable effect on the prices of bonds with every change in the
level of interest rates. (The predictability here however refers to the direction of the price change rather than
the quantum of the change) When the prevailing interest rates in the market rise, the prices of outstanding
bonds will fall to equate the yield of older bonds with higher-interest rates of new issues. This will happen as
there will be very few takers for the lower coupon bonds resulting in a fall in their prices. The prices would
fall to an extent where the same yield is obtained on the older bonds as is available for the newer bonds.
When the prevailing interest rates in the market fall, there is an opposite effect. The prices of outstanding
bonds will rise, until the yield of older bonds is low enough to match the lower interest rate on the new bond
issues.
These fluctuations ensure that the value of a bond will never be the same throughout the life of the bond and
is likely to be higher or lower than its original face value depending on the market interest-rate, the time of
maturity (or call as the case may be), and the coupon rate on the bond.
1.9 MARKET STRUCTURE OF DEBT MARKET

1. Trading structure in the Wholesale Debt Market
The Debt Markets in India and all around the world are dominated by Government Securities, which account
for between 50 - 75% of the trading volumes and the market capitalization in all markets. Government
Securities (G-Secs) account for 70 - 75% of the outstanding value of issued securities and 90-95% of the
trading volumes in the Indian Debt Markets. State Government securities & Treasury Bills account for round
3-4 % of the daily trading volumes. The trading activity in the G-Sec. Market is also very concentrated

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currently (in terms of liquidity of the outstanding G-Secs.) in the top 10 liquid securities, accounting for
around 70% of the daily volume.
2. the main investors of Govt. Securities in India
Traditionally, the banks have been the largest category of investors in G-secs accounting for more than 60%
of the transactions in the Wholesale 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:-
 Risk free nature of the Government Securities.

 Greater returns in G-Secs as compared to other investments of comparable nature.
3. regulates the fixed income markets
The issue and trading of fixed income securities by each of these entities are regulated by different bodies in
India. For example: Government Securities and issues by Banks and Institutions are regulated by the RBI.
The issue of nongovernment securities comprising basically of Corporate Debt issues is regulated by SEBI.
4. the main features of G-Secs and T-Bills in India
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 bearing (Interest rate) bearing and have semi-annual
coupon or interest payments with tenure of 5 to 30 years. This may change according to the structure of the
Instrument.
Example: A 11.50% GOI 2014 security will carry a coupon rate (Interest Rate) of 11.50% p.a. on a face
value per unit of Rs.100/- payable semi-annually and maturing in the year 2014.
Treasury Bills are for short-term instruments issued by the RBI for the Govt. to finance the temporary
funding requirements and are issued with 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 the RBI on behalf of each of the state governments and are
coupon-bearing bonds with a face value of Rs.100 and a fixed tenure. They account for 3-4 % of the daily
trading volumes.
5. the segments in the secondary debt market
The segments in the secondary debt market based on the characteristics of the investors and the structure of
the market are:
 Wholesale Debt Market - Where the investors are mostly Banks, Financial Institutions, the RBI,
Primary Dealers, Insurance companies, MFs, Corporates and FIIs.
 Retail Debt Market involving participation by individual investors, provident funds, pension funds,
private trusts, NBFCs and other legal entities in addition to the wholesale investor classes.

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6. Structure of the Wholesale Debt Market
The Debt Market is today in the nature of a negotiated deal market where most of the deals take place
through telephones and are reported to the Exchange for confirmation. It is therefore in the nature of a
wholesale market.
7. The most prominent investors in the Wholesale Debt Market in India
The Commercial Banks and the Financial Institutions are the most prominent participants in the Wholesale
Debt Market in India.
During the past few years, the investor base has been widened to include Cooperative Banks, Investment
Institutions, cash rich corporates, Non-Banking Finance companies, Mutual Funds and high net-worth
individuals. FIIs have also been permitted to invest 100% of their funds in the debt market, which is a
significant increase from the earlier limit of 30%. The government also allowed in 1998-99 the FIIs to invest
in T-bills with a view towards broad basing the investor base of the same.
8. The issuance process of G-secs
G-secs. are issued by the RBI on either a yield-based (participants, bid for the Coupon payable) or a 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) or a Uniform price Auction (all
participants Get allotments at the same price).
The 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.
9. The types of trades in the Wholesale Debt Market
There are normally two types of transactions, which are executed in the Wholesale Debt Market:
 An outright sale or purchase, and

 A Repo trades
10. Repo trade and how it is different from a normal buy or sell transaction
An outright Buy or sell transaction is the one where there is no intended reversal of the trade at the point of
execution of the trade. The buy or sell transaction is an independent trade and is in no way connected with
any other trade at the same or a later point of time.
A Ready Forward Trade (which is normally referred to as a Repo trade or a Repurchase Agreement) is a
transaction where the said trade is intended to be reversed at a later point of time at a rate which will include
the interest component for the period between the two opposite legs of the transactions.

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So, in such a transaction, one participant sells securities to the other with an agreement to purchase them back
at a later date. The trade is called a Repo transaction from the point of view of the seller and a Reverse Repo
transaction from point of view of the buyer.
Repo, therefore, facilitate creation of liquidity by permitting the seller to avail of a specific sum of money
(the value of the repo trade) for a certain period in lieu of payment of interest by way of the difference
between the two prices of the two trades.
1.10 History of the Indian Debt Market

The debt is one of the most critical components in the financial system of any economy and acts as the
fulcrum of a modern financial system.
The debt market in most developed countries is many times bigger than the other financial markets including
the equity market. The US bond market is more than $13.5 trillion in size with a turnover exceeding $500
billion daily representing the largest securities market in the world. The size of the world bond markets is
close to US $31.4 trillion which is nearly equivalent to the total GDP of all countries in the world.
The total size of the Indian debt market is currently estimated to be in the range of US $92 billion to US $100
billion. India’s debt market accounts for approximately 30 percent of its GDP. The Indian bond market
measured by the estimated value of bonds outstanding is next only to the Japanese and Korean bond markets
in Asia. The Indian debt market, in terms of volume, is larger than the equity market. In terms of daily settled
deal, the debt and the forex markets market currently (2001-02) command a volume of Rs 25,000 crore
against a meager Rs 1,200 crore in the equity markets (including equity derivatives).
In the post reforms era, a fairly well segmented debt market has emerged comprising:
1. Private corporate debt market

2. Public sector undertaking bond market and
3. Government securities market
The government securities market accounts for more than 90 percent of the turnover in the debt market. It
constitutes the principal segment of the debt market.
The Indian debt market has traditionally been a wholesale market with participation restricted to few
institutional players – mainly banks. The banks were the major participants in the government securities
market due to statutory requirements. The turnover in the debt market
too was quite low a few hundred crores till the early 1990s. The debt market was fairly underdeveloped due
to the administrated interest rate regime and the availability of investment avenues which gave a higher rate
of return to investors.
In the early 1990s, the government needed a large amount of money for investment in development and
infrastructure projects. The government realized the need of a vibrant, efficient and healthy debt market and
undertook reform measures. The Reserve Bank put in substantial efforts to develop the government securities
market but its two segments, the private corporate debt market and public sector undertaking bond market,
have not yet fully developed in terms of volume and liquidity.

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It is debt market which can provide returns commensurate to the risk, a variety of instruments to match the
risk and liquidity preferences of investors, greater safety and lower volatility. Hence the debt market has a lot
of potential for growth in the future. The debt market is critical to the development of a developing country
like India which requires a large amount of capital for achieving industrial and infrastructure growth.
Regulation of Debt Market: The Reserve Bank of India regulates the government securities market and
money market while the corporate debt market comes under the purview of the Securities Exchange and
Board of India (SEBI).
In order to promote an orderly development of the market, the government issued a notification on March 2,
2000 delineating the areas of responsibility between the Reserve Bank and SEBI. The contracts for sale and
purchase of government securities, gold related securities, Money market securities and securities derived
from these securities and ready forward contracts in debt securities shall be regulated by the Reserve Bank.
Such contracts, if executed on the stock exchanges shall, however, be regulated by SEBI in manner that is
consistent with the guidelines issued by the Reserve Bank.
Link between Money Market and Debt Market:
The money market is market dealing in short term debt instruments (up to one year) while the debt market is
a market for long term instruments (more than one year) The money market supports the long-term debt
market by increasing the liquidity of securities. A developed money market is a prerequisite of the
development of a debt market.
1.11 Features of Debt Market
The bond/ Debt market is of central importance to economic activity. The bond market is vital for economic
activity because it is the market where interest rates are determined. Interest rates are important on a personal
level because they guide our decisions to save and to finance major purchases (such as houses, cars, and
appliances, to give a few examples).
From a macroeconomic standpoint, interest rates have an impact on consumer spending and on business
investment. The features of debt markets can be summarized as follows:
1. Classified into Segments

2. Nomenclature of Markets
3. Changing Structure
4. Changes in Post Liberalization Era
5. Diversified Participants
6. Fixed Return
7. Larger Volume
8. Variety of Debt Instruments
9. Stringent Regulation
10. Type of Transactions
11. Dematerialization of Debt Securities
12. Wholesale Debt Market
13. Retail Debt Market

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1-Classified into Segments
There are three main segments in the debt markets in India, viz.
 Government Securities
 Public Sector Units (PSU) bonds
 Corporate securities
The market for Government Securities comprises the Centre, State and State-sponsored securities. In the
recent past, local bodies such as municipalities have also begun to tap the debt markets for funds. Some of the
PSU bonds are tax-free, while most bonds including government securities are not tax-free.
Corporate bond markets comprise commercial paper and bonds. These bonds typically are structured to suit
the requirements of investors and the issuing corporation and include a variety of tailor-made features with
respect to interest payments and redemption.
2-Nomenclature of Markets
The debt market often goes by other names, based on the types of debt instruments that are traded. In the
event of the debt market dealing mainly with municipal and corporate bonds, the debt market may be known
as a bond market.
If mortgages and notes are the main focus of trading, the debt market may be known as a credit market. When
fixed rates are connected with the debt instruments, the market may be known as a fixed income market.
3-Changing Structure
In the majority of the countries, the debt market is more popular and many times bigger than other financial
markets including the equity market. However, in India, the opposite was true for a very long time, because
of the existence of a passive internal debt management policy, where only the government borrowed from a
captive group of investors like banks.
The Indian debt market, in the pre-liberalization era, was characterized by controls on pricing of assets,
segmentation of markets and barriers to entry, low levels of liquidity, the limited number of players, near lack
of transparency and high transaction costs.
4-Changes in Post Liberalization Era
The debt market in India has traditionally been a wholesale market with participation restricted to a few
institutional players – mainly banks. Indian securities and bonds markets have witnessed far-reaching reforms
in the post-liberalization era in terms of market design, technological developments, settlement practices and
introduction of new instruments

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To34-day, we have integrated trading, clearing and payment platforms, which enable seamless settlement of
transactions. The markets have achieved tremendous stability and as a result, have attracted huge investment.
5-Diversified Participants
The investors in the debt markets concentrate on banks, financial institutions, mutual funds, provident funds,
insurance companies and corporations. Many of these participants are also issuers of debt instruments.
6-Fixed Return
The most distinguishing feature of debt instruments of the Indian debt market is that the return is fixed, i.e.,
returns are almost risk-free. This fixed return on the bond is often termed as the ‘coupon rate’ or the ‘interest
rate’.
7-Larger Volume
The Indian debt market, in terms of volume, is larger than the equity market. The Indian debt market
measured by the estimated value of bonds outstanding is next only to Japanese and Korean bond markets in
Asia.
8-Variety of Debt Instruments
A variety of debt instruments have been introduced into the Indian capital market in recent years. They are
called new innovative instruments. These new instruments may again be divided into two categories:
instruments issued by corporate and instruments issued by financial intermediaries.
In the first category, we have participating debentures, convertible debentures with options, fully convertible
debentures, warrants and so on. In the second category, we may mention floating rate bonds, zero-coupon
bonds, regular income bonds, retirement bonds, growth bonds, index bonds, deep discount bonds and so on.
9-Stringent Regulation
The regulatory jurisdiction over the corporate debt has been assigned to the Indian securities market regulator
SEBI under SEBI Act, 1992. For Government debt securities, RBI has the jurisdiction to provide the
guidelines to run the debt market.
To avoid the confusion of multiple regulations, a notification issued by the Government on March 2, 2000,
clearly defined the areas of responsibility between RBI and SEBI. The issue of corporate debts is also under
the regulation of SEBI. The issuance of debt instruments by the government is regulated by the Government
Securities Act 2006.
The issuance of corporate securities is regulated by the SEBI Guidelines for disclosure and Investor
protection. The Government Securities Act, 2006 was enacted by the Parliament in August 2006. The RBI
made Government Securities Regulation, 2007 to carry out the purpose of the Government Securities Act,

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2006. The Act and the Regulations are applicable to Government securities created and issued by the Central
and the State governments.
10-Type of Transactions
There are two types of transactions in the debt market. Firstly, there are direct transactions between wholesale
market participants. These account for approximately 25% of the wholesale market volumes. Secondly, there
are broker intermediated transactions i.e., where brokers undertake dealings for banks, institutions or other
entities.
11-Dematerialization of Debt Securities
The government abolished stamp duty on debt securities to boost the dematerialization of debt securities and
enhance levels of trading in corporate debt securities. Both the NSDL and the CDSL were permitted to admit
debt instruments to the depository.
The debt instruments include debentures, bonds, commercial papers, and certificates of deposit, irrespective
of whether these instruments are listed, unlisted or privately placed. With dematerialization, it has become
possible for banks to sell securities in smaller lots to corporate clients, provident funds, trusts, and others.
The cost of holding securities in Demat form is negligible as most of the banks are depository participants
(DPs) of NSDL.
12-Wholesale Debt Market
The National Stock Exchange of India Ltd set up a separate segment for trading in debt securities known as
the Wholesale Debt Market segment of the exchange. Prior to the commencement of trading in the WDM
segment of the NSE, the only trading mechanism available in the debt market was the telephone.
The NSE provided, for the first time in the country, an online, automated, screen-based system known as
NEAT (National Exchange for Automated Trading) across a wide range of debt instruments. In the WDM
trading system, there are two markets:
 Continuous Market
 Negotiated Market. In the continuous market, the buyer and seller do not know each other and they
put their orders. If the orders match, it results in a trade which is settled directly between the
participants. In the negotiated market, no counter-party exposure limit needs to be involved as the
participants are familiar with each other.
 This system is an order-driven system which matches the best buy and sells orders on a price time
priority and simultaneously protects the identity of the buyer and the seller.
13-Retail Debt Market
It involves participation by individual investors, small trusts and other legal entities in addition to the
wholesale investor classes.

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1.12 Issues Concerned with Indian Debt Market
The corporate debt market in India is yet to be fully developed. Despite various reforms in the corporate debt
market, still, there are certain issues that need to be addressed and changes will have to be made in the
existing policy framework. These issues are discussed below:
1. Lack of Liquidity in respect of many Debt Instruments in the Secondary Market

2. Increasing the Number of Participants
3. Need for Change in Attitude of Retail Investors
4. Need for Innovative Instruments
5. Greater Disclosure in Respect of Privately Placed Debt Instruments
1-Lack of Liquidity in respect of many Debt Instruments in the Secondary Market
The secondary market for corporate debt instruments is illiquid. In the absence of an active secondary market,
investors have difficulties to sale debt instruments in the secondary market. The concepts of Primary Dealers
need to be introduced in respect of the corporate debt segment to create a secondary market in respect of a
large number of corporate debt securities which are not listed on stock exchanges.
2-Increasing the Number of Participants
Increasing the number of players in the market will result in participants being available on both sides of the
market and will also boost volumes. Various institutional investors need to be encouraged to participate in the
secondary market.
FIIs also will have to be encouraged to invest in corporate debt securities. The Pension funds, provident funds
and charitable funds, etc., need to be encouraged to participate in the market. For this, suitable tax benefits
can be offered to the investors.
3-Need for Change in Attitude of Retail Investors
There is a need to encourage the participation of retail investors in the corporate debt market. Retail investors
do not trade in the corporate debt securities in the secondary market. The normal tendency is to invest in and
hold corporate debt securities till maturity.
This attitude needs to be changed. The retail investors will have to be encouraged to trade in corporate debt
securities in the secondary market. The primary dealers can play a significant role in this regard. They have to
offer two-way quotes in respect of a large number of debt securities.
4-Need for Innovative Instruments

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There is no point in offering only plain Vanilla debt securities. In order to encourage savings from small
investors and attract investment from institutional investors, there is a need to bring innovations in the issue
of debt instruments.
The debt securities having features such as monthly interest payment, deep discount bonds, bonds with put
and call options and floating rate bonds etc., are likely to be subscribed by both institutions as well as retail
investors. Therefore, more variety of debt instruments needs to be offered to the retail and institutional
investors.
5-Greater Disclosure in Respect of Privately Placed Debt Instruments
A larger portion of the corporate debt securities is privately placed. In view of this, various issues relating to
the private placements need to be addressed. In this context, it is essential to ensure greater transparency,
adequate disclosures, minimum credit rating and proper accounting standards.
This will enhance the confidence of investors in the debentures issued by private corporate entities. Credit
rating agencies will require taking utmost care while the rating of debt instruments that are privately placed.
1.13. Advantages of investing in debt instruments
1-Guaranteed returns
The primary feature of debt instruments is the guaranteed returns they promise. Every debt instrument carries
a fixed rate of return, giving you a guaranteed income over the tenure of the investment.
So, if you are risk-averse or want guaranteed investment returns, the debt market can always be a safe and
suitable choice.
2-Safety from market volatility
The equity market is prone to volatility, wherein the value of investments fluctuates constantly. This
volatility, however, is usually negligible in debt markets.
3-Portfolio diversification
A diversified portfolio is helpful for risk mitigation and also for enhanced returns. The debt market allows
you to add the debt component to your portfolio and diversify it. Moreover, with their fixed returns, debt
instruments also make the portfolio returns more stable.
4-Tax benefits
Some debt instruments offer tax benefits as well. For instance, if you invest in 5-year fixed deposits or in
National Savings Certificates, your investment qualifies for a tax deduction under Section 80C. The
deduction limit is Rs.1.5 lakhs which can give you a tax saving of Rs.45,000 if you fall in the 30% tax
bracket.
These are the advantages of debt market given below:
1. The biggest advantage of investing in Indian debt markets is its assured returns.

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2. 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).
3. Government securities are safest avenues. 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.
4. Another advantage of investing in India debt market is its high liquidity.
5. Banks offer easy loans to the investors against government securities.
6. Greater safety and lower volatility as compared to other financial instruments.
7. Higher leverage available in case of borrowings against government securities.
8. Greater diversification opportunities, adequate trading opportunities with continuing volatility

expected in interest rates.
9. It speeds up the economy by making it possible for banks to offer mortgages to consumers.
1.14. Disadvantages of investing in debt instruments
While you can enjoy the benefits of investing in the debt market, there are some drawbacks too that you
should be aware of. These include:
 Vulnerability to debt market risks. Though the debt market does not face significant volatility
risks, other risks affect the market, which are:
 Default or credit risk – the risk that the issuing entity defaults on interest and/or principal
repayment
 Interest rate risk – Debt instruments follow an inverse relationship with the fluctuating interest
rates of the economy. When interest rates rise, the value of debt instruments falls and vice-
versa.
 Reinvestment risk – the risk of reduction in the interest rate at the time of the security’s
maturity, leaving you with minimal or no options for reinvestment.
Such risks might impact your returns when you invest in the debt market.
 The returns are not inflation-adjusted
While the debt market promises guaranteed returns, the returns are not usually inflation-adjusted, which
means that the returns do not factor in the loss of the purchasing power of money due to inflation.
So, the returns you get might not have any real value if inflation is higher than the returns from the security.

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For example, you invest Rs. 1000 in a fixed deposit and get Rs. 1200 after five years. At the time you
invested that Rs. 1000, you were able to buy 100 units of a pen with that money (Price of 1 pen= 1000/100,
i.e., Rs.10)
However, after five years, the cost of the same pen increased to Rs. 15.
So, now with your corpus of Rs.1200, you can buy only 80 pens (1200/15). While it seems that you earned
Rs. 200 in five years, the return has no real value if inflation is considered.
 Liquidity concerns
Debt instruments restrict premature withdrawals. If you make such withdrawals, you might face a penalty.
Moreover, even in the case of bonds that can be traded on the stock exchange, you might not get a fair price
when you sell the bond immediately to raise liquid funds.
So, if you want liquidity in your portfolio, debt instruments might fail to meet your expectations.
These are the disadvantages of debt market explained below:
1. 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 the
same time.
2. 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.
3. Debt securities usually have much smaller price changes than stocks or commodities. Traders in
debt securities must take larger positions to achieve the same level of profits.
4. The debt trading markets are dominated by hedge funds and the trading desks of large financial
institutions. These traders have access to information and capital that is difficult or impossible for
the individual trader to obtain. By the time the small trader gets the news that these large players
are trading on, it may be too late to profit from the news.
5. Traders in corporate debt securities trade high-yield or junk bonds to earn the higher interest rates
these bonds pay. The trader can also achieve capital gains if the issuing corporation gets an
upgrade in its credit rating. The downside of high yield bonds is a bankruptcy and total loss of the
principal invested.
1.15. Functions of Debt Market
Some financial institutions of the debt market provide managerial and technical know-how to industrial
organizations. This service is also of great help for the expansion of the industrial sector of an economy.
Other key functions of debt markets can be summarized as follows:
1. Mobilize long-term savings to finance long-term investments.

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2. Provide capital in the form of debt to entrepreneurs.
3. Encourage broader ownership of productive assets.
4. Provide liquidity with a mechanism enabling the investor to sell financial assets.
5. Lower the costs of transactions and information.
6. Improve the efficiency of capital allocation through a competitive pricing mechanism.
7. Enable quick valuation of financial instruments both equity and debt.
8. Enable wider participation by enhancing the width of the market by encouraging participation
through networking institutions and associating individuals.
9. Provide operational efficiency through: simplified transaction procedures: lowering settlement

timings; and Lowering transaction costs.
10. Develop integration among: real and financial sectors; equity and debt instruments; long-term and
short-term funds; long-term and short-term interest costs; private and government sectors; and o
Domestic and external funds.
11. Direct the flow of funds into efficient channels through investment, disinvestment, and
reinvestment.
Thus, we can say that without a developed debt market, the economic development of a country is not
possible. The process of economic development might be slow or may even be halted if the debt market is
underdeveloped and unorganized.
Chapter 2. RESEARCH
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METHODOLOGY
2.1 Objectives:
The main objectives of debt market are:
1. To minimize the interest cost of servicing the debt to the taxpayer.
2. To employ it contra-cyclically as a stabilization weapon to supplement monetary and fiscal policy.
There are potential conflicts between these two objectives because they often entail opposite policy actions.
Minimizing the interest cost means that during a recession, interest rates are low. The government should
exchange its maturing securities with hew long-term securities carrying low interest rates so that their interest
cost is less in the future.
On the other hand, when interest rates are high during a boom, the government should exchange its maturing
securities with short-term securities which carry low interest rates so that it has not to pay high rates when the
interest rates fall to normal levels.
The stabilization objective requires opposite policies. During a recession, the government should sell short-
term securities which should lower interest rates and increase investment spending. On the other hand, during
a boom, it should sell long-term securities which would raise long-term interest rates. This would reduce
investment spending.
The objective of debt market t in a broad sense is to aid economic growth and development. The principal
role of debt markets is to transfer capital from savers to borrowers / investors, and allocate them in an

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efficient manner among competing uses in the economy, thereby contributing to growth both through
increased investment and through enhanced efficiency in resource use. As debt markets link issuers having
long-term financing needs with investors willing to place funds in long-term, interest-bearing securities, a
developed domestic bond market offers a wide range of opportunities for funding the government and the
private sector. The debt markets also specialize in transferring, pooling as well as sharing risks. The debt
market, especially Government securities market serves, as a benchmark for pricing other financial assets and
thereby helps the monetary policy transmission. In the Indian context, the transmission from shorter to longer
end of the yield curve is a function of, changes in monetary policy rates, inflation levels, international interest
rates and, liquidity conditions including the SLR stipulation.
The objective of this study is twofold. First, it traces the development of the corporate bond market in India
and second, it attempts to seek policy inputs based on the experience of other emerging markets in
developing their corporate bond market. A simple regression analysis is carried out based on data available
from Reserve Bank of India, National Stock Exchange (NSE), Securities and Exchange Board of India
(SEBI) and the Bank for International Settlements (BIS). While the principal focus of the study is the
corporate bond market developments in India, we also take into account the developments of the Government
bond market and equity market in India in relation to the corporate bond market. A well-developed capital
market consists of equity and bond market. A sound bond market with a significant role played by the
corporate bond market segment is considered to be important for an efficient capital market. The corporate
bond market ensures that funds flow towards productive investments and market forces exert competitive
pressures on lending to the private sector. While India boasts of a world-class equity market, its bond market
is still underdeveloped as compared to other Asian countries (e.g., South Korea). The Asian financial crisis of
1997-98 brought to the forefront the limitations of even a well-managed, regulated and supervised banking
system in countries like Hong Kong and South Korea. The crisis clearly showed that banking systems cannot
be the sole source of long-term investment in an economy. In this context, Jiang, Tang and Law (2002) point
out that one of the principal benefits of a well-developed corporate bond market is to provide an effective
alternative source of financing to bank financing. Further, they list the following important advantages of
bond financing over bank financing.
Bank financing and corporate bonds deal differently with information asymmetries. While bond financing
involves spreading credit risk over a large group of diverse bondholders, banks tend to minimize credit risks
of borrowers and manage their risks by monitoring borrowers. · Bank financing involves maturity
transformation as liabilities of banks are typically short-term in nature and assets have longer maturities
whereas in bond financing, investors are fully aware of the yields and time horizons of their investments. ·
Bond market provides a yield curve or a market-determined term structure of interest rates. The yield curve
serves as a benchmark for pricing credit risk and other financial products. 7 · Bond financing lowers funding
cost for high quality borrowers as intermediation costs are lower for bond financing than for bank financing. ·
A well-developed bond market introduces a healthy competition with the banking sector in providing
corporate financing. · Bond market allows pooling of risks through securitization (such as mortgage backed
or asset-backed securities). · A well-developed corporate bond market increases economic welfare as it
complements other financial instruments and provides a full spectrum of investment vehicles whose payoffs
across contingencies or states of nature cannot be easily replicated by other securities in the market (for
example, pension funds and insurance companies like to hold low risk debt instruments, with a stable income
stream, which, in general, are not be provided by the equity market).
Bond market helps in spreading the risk among ultimate savers rather than get concentrated in the
intermediaries. Luengnaruemitchai and Ong (2005) in their IMF working paper opine that core aspects such
as benchmarking, corporate governance and disclosure, credit risk pricing, the availability of reliable trading
systems, and development of hedging instruments are fundamental for improving the breadth and depth of
corporate debt market. Further, the authors note that the demand and supply of corporate bonds are dependent
on factors such as the investor base - both domestic and foreign, and Government policies toward the
issuance process and associated costs as well as the tax regime. Torre, Gozzi and Schmulker (2006) argue that
there are two major approaches to develop capital markets, in general, in emerging markets. The first one
explains that the gap between expectations and observed outcomes is due to the combination of impatience

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with imperfect and incomplete reform efforts. This view argues that past reforms are mostly right, reforms
needed in the future are essentially known, and that reforms have long gestation periods before producing
visible results. The second approach emphasizes on the right sequencing. This view claims that the gap is due
to faulty reform sequencing where some reforms are implemented ahead of others, and argues establishing
preconditions before fully liberalizing domestic financial market and allowing free international capital
mobility. Torre, et al. (2006), however, argue a case for a third approach, which notes that in the case of some
developing countries, one needs to “revisit basic issues and reshape expectations.” The authors contend that it
is difficult to pinpoint which factors may explain the relative underdevelopment of domestic capital market in
emerging markets such as Latin America. The study notes that intrinsic characteristics (such as small size,
lack of risk diversification 8 opportunities, presence of weak currencies, and prevalence of systemic risk) of
developing countries limit the scope for developing deep domestic capital market in a context of international
financial integration and that these limitations it is difficult to overcome by the reform process. In other
words, even if emerging economies carry out all the necessary reforms, they might not be able to develop
their capital market to the extent of industrialized countries. It seems, therefore, that the path emerging
countries like India should follow is not unanimous. As a general rule, a gradual and complementary
approach is beneficial, although in some cases, a given sequencing may be preferable. While countries like
Australia have followed the sequencing approach by developing their debt markets before developing their
bond market, others such as Latin American countries have developed their markets in conjunction with other
markets. In India, various committees viz. the High-Level Expert Committee on corporate bonds (Patil
Committee) and the Committee for Financial Sector Reforms (CFSR), have recommended the sequencing
approach, which entails developing a number of missing markets as well as complementary development of
other sectors in the economy for a healthy development of the corporate bond market.
2.2 Scope
The capital market of an economy is considered to be well developed, only when a parallel development is
ensured both in the equity and the debt segment. There is no doubt that the equity market in India is quite
well developed and plays a crucial role in the growth of Indian economy. At the same time, Govt. debt market
in India has also experienced a tremendous growth in the last decade. But unlike Govt. bonds, the corporate
debt segment in India is still in the nascent stage and requires lot of initiatives to bring it to the Global
standard. Bonds of different tenors issued by Central or State Governments and other PSUs capture more than
80 percent of the total debt market volume in India. Therefore, it has become very important to have a well-
run and liquid corporate bond market that can play a critical role in supporting economic development in
India, both at the macroeconomic and microeconomic levels. Massive future growth in infrastructure, as
required to achieve the higher GDP growth, can only be ensured through availability of long-term financing
and also at a reasonable cost. Due to several issues, applicable to several market players, bank financing is
not the right choice to meet all the financing needs to facilitate such growth. A well-developed corporate bond
market can be the optimal alternative, not only to support the financing requirement for infrastructural
development, but also to relieve banks from all the problems of long-term financing, and spreading out the
huge financing risk to a wider investor base to strengthen India’s bank-based financial system, to allow
corporate borrowers to tap the low cost market, to enable investors including FIIs to earn fixed but higher
returns, and above all to ensure overall growth of the economy.
The present study analyses the existing structure of Indian corporate bond market, vis-à-vis the other
developed markets, and attempted to explain the movements and changes taken place in Indian debt market
during the last decade, may be as a result of several regulatory initiatives. The importance of a well-
developed corporate bond market for various groups of Indian financial sector, followed by the important
factor contributing to the inferior growth of such market, supported by several facts and figures, are discussed

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in the study. It has been finally observed that, even if some changes have taken place to strengthen Indian
corporate debt market, the market has a significant scope to contribute to the overall growth of Indian
economy, but obviously subject to some very important and stringent initiatives from the Government and the
concerned regulatory bodies.
A well-developed corporate bond market is essential for the efficiency and stability of a country's financial
system and the overall growth of its economy. Issuers and investors' access to the market provides for
financial diversification and facilitates necessary financing, which benefits not only AAA-rated corporations
but also less well known, sub-investment grade corporations and infrastructure developers. This note
examines the state of India's corporate bond market, identifies constraints that inhibit its size and depth, and
suggests reform measures that India needs to take to develop its market into a competitive source of financing
for a wide range of issuers and an attractive investment for a wide range of investors. Recommendations are
based not only on an assessment of conditions in India, but also on relevant international experience.
2.3 Role of State in Developing Debt Markets

Mr. Robert Sheehy, Mr. Coskun Cangoz, Mr Jin Myung Kim, Mr Otavio Ladeira de Medeiros, Mr. Thordur
Jonsson and distinguished participants. It is a great pleasure to be in the city of Doha and share my thoughts
with such a distinguished gathering in the Conference jointly organized by the Qatar Central Bank and the
International Monetary Fund. I am particularly thankful to Mr Abdulla bin Saud Al-Thani, Governor, Qatar
Central Bank and Mr. Ananth Krishnan Prasad of the International Monetary Fund, for having invited me in
the Conference. The importance of debt markets in catalysing the growth of economy is well recognized and
accepted. Therefore, State, and by State, I mean both the government and central bank, has an interest in
developing debt markets. In pursuit of this interest, the state has a critical role to play in fostering a sound and
diversified debt market, which efficiently performs the function of financial intermediation. The increased
role of the State in the financial markets and, particularly, in the debt markets was evident across several
countries during the recent global financial crisis and European sovereign debt crisis. For example, in the
backdrop of heightened volatility and dysfunctional of collateral markets, the central banks bought large scale
assets (government bonds, corporate bonds, securitized bonds, etc.) to calm down the markets and bring back
normalcy.
Historical perspective
A survey of the world's major developed bond markets reveals diverse paths of development. Therefore, I
would start by briefly discussing the state’s role in the debt markets from a historical perspective. State’s
involvement in debt markets has a long history. The State started borrowing in the Middle Ages in Europe.
The earliest loans of medieval times were either forced loans or personal borrowing by the sovereign, usually
to finance wars. It is interesting to note that lending to the sovereign entailed significant credit risk in those
times. The extensive use of loans by governments became possible only after the ruler had become
differentiated from the state and after the fact of the continuity of the state had been separated from the
persons of the rulers. Other factors which facilitated borrowings were: the development of a regular revenue
source to provide funds for repayment of loans, a monetary system, and an organized money market.
Since the late Middle Ages, governments began to raise money through long and short-term loans. Initially,
indebtedness was intended to finance war budgets, but gradually money was channelled towards civil
purposes such as public works or food supply. Public debt became a trusted tool of political economy and
financed expenditure in place of levying unpopular taxes. In the main European cities, government bonds
became freely marketable. Trading procedures, guarantees and techniques became well known to investors at

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a national and international level. The increasing efficiency of financial markets allowed governments to raise
money at decreasing costs whilst savers could use long term public loans as an assured alternative to
traditional investments in land. State has recognized the efficacy of a developed debt market and modern
governments continue to borrow because of inevitable mismatches in revenue and spending. Other reasons
include supporting inter-generational fairness, stabilizing tax rates, implementing macroeconomic
management, and finally, for political expediency in running the desired programmes for achieving socio-
economic and political objectives.
Objectives of debt market development

The objective of debt market development in a broad sense is to aid economic growth and development. The
principal role of debt markets is to transfer capital from savers to borrowers / investors, and allocate them in
an efficient manner among competing uses in the economy, thereby contributing to growth both through
increased investment and through enhanced efficiency in resource use. As debt markets link issuers having
long-term financing needs with investors willing to place funds in long-term, interest-bearing securities, a
developed domestic bond market offers a wide range of opportunities for funding the government and the
private sector. The debt markets also specialize in transferring, pooling as well as sharing risks. The debt
market, especially Government securities market serves, as a benchmark for pricing other financial assets and
thereby helps the monetary policy transmission. In the Indian context, the transmission from shorter to longer
end of the yield curve is a function of, inter alia, changes in monetary policy rates, inflation levels,
international interest rates and, liquidity conditions including the SLR stipulation.
Bond market in India and Asia

Indian bond market has made rapid strides in the last few years due to several initiatives undertaken by the
state, central bank and other stake holders. Although activities in corporate bonds market have picked up, the
Indian bonds market continues to be dominated by Government bonds market. One of the landmark
initiatives in this regard was phasing out of automatic monetization of fiscal deficit through issue of ad hoc
Treasury Bills with effect from April 1, 1997 through a supplemental agreement signed between Government
of India (GoI) and RBI on March 26, 1997. This agreement paved the way for funding the fiscal deficit of
GoI through market loans and thereby, need to develop the Government bonds market. Another landmark
initiative was Fiscal Responsibility and Budget Management (FRBM) Act, 2003 prohibiting RBI’s
subscription to the Government bonds in the primary auction with effect from April 1, 2006. This initiative
resulted in issuance of all Government bonds in the market and improved the depth of both primary and
secondary segments of the Government bonds market.
Some of the other important initiatives taken with respect to the Government bonds market were (i) State
governments’ fund raising shifting to market through an auction system; (ii) introduction of primary dealers
(PDs) network; (iii) introduction of When Issued market; (iv) issuance of half-yearly auction calendars
covering quantum, timing & tenor of securities for providing transparency and certainty to the market
participants; (v) setting up electronic platforms for primary auctions, namely, the Negotiated Dealing System
Auction (NDS-Auction); and (vi) setting up electronic Order Matching (OM) platform for secondary market
trade, namely, the NDS-OM. Consequently, the volume in Government bonds market increased significantly:
Table 1: Volume in Government Bonds Market

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(₹ Billion)
Year Primary Secondary Market Trade$
Issuances
2005-06 1,527 8,648
2006-07 1,668 10,215
2007-08 2,238 16,539
2008-09 3,911 21,602
2009-10 5,821 29,139
2010-11 5,410 28,710
2011-12 6,686 34,882
Gross for Central and State Governments. $Single-side volume.
The bond markets across the Asian region have witnessed substantial progress after the Asian crisis in the
second half of 1990s. The Asian Bonds Funds (ABF) structured by the Bank for International Settlement
(BIS) in response to a proposal by the East Asia and Pacific Central Banks (EMEAP) group in June 2003 has
also played a role in the development of the Government bonds market in the Asian region. ABF allows its
members to invest in bonds issued by Asian sovereign issuers in EMEAP economies. The progress made by
the Indian Government bonds market is comparable to its peers in the Asian region. The turnover ratio (in
terms of total volume divide by average outstanding of Govt. securities) of the Indian Government bonds
market during the quarter ending March 2012 was close to the Government bonds market of several Asian
countries.
Attributes of a developed bond market

The main features of a well-developed debt market are depth, breadth, resilience and wide choice of
instruments to cater to the requirements of market participants. "Depth" connotes the extent to which it can
handle large transactions without causing sharp changes in price. "Breadth" connotes the diversity of
participants and the heterogeneity of their responses to new information while the “resilience” determines the
speed with which price fluctuations due to some shocks finally dissipate. The developed markets also have a
bouquet of instruments (bonds and derivatives) to cater to requirements of market participants. Large set of
domestic institutional investors and active interest from foreign investors can create a large and
heterogeneous group that is necessary for an efficient bond market. For example, the traditional investor base
for G-Sec in India comprised banks, provident funds, and insurance companies. With the entry of co-
operative banks, regional rural banks, pension funds, mutual funds and non-banking finance companies and
foreign institutional investors including foreign central banks; the institutional investor base has been
diversified (Chart 2). Deep, broad markets are generally more resilient and tend to display greater stability in
responding to financial and economic disturbances.
Role of State/Central Bank

The continued integration and deepening of financial markets are a significant issue for the policy-makers,
and, particularly for the central banks, entrusted with the formulation and implementation of monetary policy,
since well-integrated and efficient financial markets are crucial in ensuring a smooth transmission of
monetary impulses to the economy. Besides the state (government) having a ‘market-completion’ role, its role
in the development of the debt market stems from the fact that well developed debt market is essential for
providing stable and cost-effective funding to the various sectors, including public sector, of the economy.

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The Reserve Bank of India, like many other Central Banks has taken a proactive role in the development of
debt markets. In performing this function, the RBI played multifarious roles as central bank, debt manager to
the government and regulator of debt markets. In the above backdrop, the role of state in developing the debt
market can be analysed through following three channels:
 Issuer of debt
 Debt management strategy and framework
 Developer of bond markets
 Institutional framework- market infrastructure- investor and instrument universe
 Regulator of bond markets
 Systemic stability- market integrity- consumer protection
Issuer of debt
The first major bond market to develop is usually the market in government obligations. In many countries,
the government has the largest stock of issues outstanding in its name. Government bond prices serve as a
basis for pricing the issues of other borrowers who are subject to credit risk. In most countries, governments
issue debt to fund the gap between tax receipts and current expenditures, and sometimes to finance some
extraordinary current expenditure. The US bond market, for example, took flight after the issuance of Liberty
Bonds to finance US participation in World War I. The favourable experience investors had with these bonds
left them willing to invest in securities issued by corporations. This gave fillip to the corporate bond market
and made possible the significant expansion of these markets.
This does not mean that fiscally conservative governments that do not run deficits cannot nurture a robust
debt market. Hong Kong and Singapore have issued bonds despite running surplus budgets. Hong Kong
developed a benchmark yield curve in Hong Kong dollars through issues of Exchange Fund Bills and Notes,
the proceeds of which are used primarily to invest in international markets, not to fund government spending.
Australia and Norway are other countries which issued debt even though they ran surplus / balanced budgets.
Debt management strategy & framework

Investors’ confidence in the quality, safety and integrity of the public debt management is the pre-condition
for the development of the Government bonds market and credible debt management strategy (DMS) is one
of the factors that create this confidence. DMS, comprising of objectives, various benchmarks and portfolio
indicators and yearly issuance plan (external and domestic funding, instruments, maturity structure, etc.)
provides requisite information and transparency, certainty and enables market participants (investors) to chalk
out their investment strategy in Government bonds market. Further, DMS, which ensure that both level and
rate of growth in public debt is fundamentally sustainable over time and can be serviced under a wide range
of scenarios while meeting cost and risk objectives, gives fillip to the confidence of the investors and,
thereby, help in development of the Government bonds market. In essence, DMS revolves around three broad
pillars viz., cost minimization, risk mitigation (e.g. roll-over risk, cash flows risk, etc.), and market
development.
A well-developed bond market will ensure a stable and sustainable source of financing for governments to
meet their investment needs while preserving debt sustainability. On the other hand, a shallow domestic
market is often the most important constraint limiting the access to local currency funding at long maturities
and fixed interest rates. In India, DMS is reviewed on half-yearly basis in the joint Monitoring Group on
Cash & Debt Management of the Government of India and the Reserve Bank of India and it is disseminated.

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Public through release of half yearly indicative calendar for issuances of Central Government dated
securities. This half yearly calendar provides comprehensive information on issuance strategy, viz. date of
auction, total amount, maturity bucket-wise amount, nature of instruments (floating or/and fixed instruments).
Further, a week prior to the auction, individual securities along with their issuance size is notified to the
public. This strategy of sharing information about debt management has enhanced transparency of debt
management operations and greatly helped the development of the Government bonds market. The
formulation of the DMS should follow some intuitive guidelines, especially in order to improve depth and
breadth of the government bonds market and these guidelines should favour cost minimization over medium
term subject to prudent degree of risk, achieving a stable mix of borrowings in domestic and foreign currency,
issuance of variety of instruments (fixed rate bonds, floating rate bonds, inflation indexed bonds, bonds with
call and put options, etc.) to cater to investors’ interest, buyback and switching operations of the issuers, etc.
The cost minimization attempted over short-term by the debt managers may create sub-optimal debt
structures, which may create stress for issuer as well as market during uncertain and volatile times and
thereby hamper the sustainable development of the bonds market. Otherwise also, exploiting the evolving
market conditions in an effort to minimize the cost over the short-term could distort the shape of the yield
curve and create demand for bonds only at certain points. Hence, DMS pursuing cost minimization over
medium-term and issuing bonds across the maturity points is considered to be a better option for the
development of the bonds market. DMS in India has stressed on elongation of maturity whenever possible
and, in turn, cost minimization over the medium term.
Next, achieving appropriate and stable mix of domestic –foreign currency debt in portfolio is essential.
Raising debt in foreign currency could bring down interest costs and provide a wide and varied investor base.
A country with largely foreign currency denominated liabilities is, however, exposed to “sudden stops” of
capital inflows and may not be able to accommodate balance of payment shocks. Moreover, cost of carry
(interest rate parity) needs to be taken into account rather than interest rate, while deciding the extent of
foreign funding. There could be increase in debt servicing costs on foreign currency which could create
macro-economic imbalances. DMS needs to factor these risks. Sizeable share of funding in domestic
currency is necessary to ensure ample supply of Government bonds in the domestic bonds market which is a
very critical ingredient for development of the domestic bonds market. Incidentally, funding fiscal deficit
through external debt has been very low in India and external debt as percentage of Central Government’s
public debt has come down from 6.4 per cent in 2005-06 to 5.2 per cent during 2011-12 (Chart 3). The
external debt in Indian context is entirely bilateral and multilateral loans. In Internal debt, large share is raised
through market loans which constituted almost entire internal debt of the Central Government (Chart 4) and
all the market loans have been raised from the domestic bond markets. This demonstrates that Government
bond markets have become instrumental for funding a large part of the Central Government fiscal deficit over
the last few years and, in turn, this large dependence on the domestic bond’s markets helped in further
improving the breadth and width of the later.
DMS involving issuance of variety of instruments of varying maturities add to the diversity of the
Government bonds markets as well as expand the investors’ base. For example, some investors (banks and
financial institutions) like to invest in floating rate bonds (FRBs) for their duration management. Similarly,
institutional investors, such as, insurance companies, provident funds, pension funds, etc. would prefer to buy
zero coupon bonds and inflation indexed bonds (IIBs) for their liability management. Governments in most of
the advanced countries and emerging market economies (EMEs) have issued a significant portion of domestic
bonds through instruments other than conventional fixed rate bonds
In India, although funds for the Central Government have been raised through issuing variety of instruments
(such as, fixed rate conventional bonds, FRBs, Zero Coupon Bonds, CIBs), the contribution of linkers (FRBs,
IIBs, etc.) has remained small except for the year 2003-04 and 2004-05 (Chart 5). Therefore, DMS for India

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also needs to increase the share of linkers in gross issuance of dated securities to further improve the breadth
and width of the Government bonds market. Towards this end, new version of the IIBs, on the pattern of
Canadian model, has been designed and it is expected to be launched in the near future.
A policy of passive consolidation through reissuance/ re-openings is being followed to improve liquidity and
to facilitate consolidation of debt. The larger stock size of securities has significantly improved market
liquidity and helped the emergence of benchmark securities in the market. Active consolidation has not been
resorted to (except a few buy-backs) in view of fiscal considerations. However, to promote liquidity, process
of active consolidation consisting of issuance of securities at various maturity points in conjunction with
further steps like buyback and switches is needed.
Market determined pricing

For market development, it is crucial that the interest rate on government bonds be market-determined. If the
government attempts to manipulate the bond market to reduce the cost of government borrowing, important
information will be lost which may lead to distortions in the allocation of capital. In India, The RBI had
undertaken a phased programme of reforms to make a transition to market determined interest rates based on
auctions. This has significantly improved price discovery process.
Benchmark yield curve

The absence of a risk-free term structure of interest rates makes it difficult to price credit risk of instruments
issued by the private sector and other issuers. Inefficiencies caused by mispricing credit risk result in
distortions in the economy. Without a government bond market that establishes benchmark risk free rates at
critical maturities, it will be very difficult to establish a corporate bond market, much less a market for high
yield debt or securitized assets. If the government’s objective is to nurture a robust bond market, then it
should aim at establishing a benchmark yield curve that can serve as the risk-free rate for the pricing of other
securities. This means committing to a programme of regular issues at the appropriate maturities. Over the
last two decades, sustained budget deficits have necessitated large issuance of government securities in India.
The increasing share of market borrowings in financing fiscal deficits of the Central government, from 21 per
cent in 1991-92 to nearly 100 per cent in 2011-12 ensured steady supply of securities to the market. The
issuance volumes have increased, thereby attaining critical mass to enable robust trading. Taking advantage
of this, we were able to develop a reasonably deep and liquid government securities market. We could extend
the risk-free yield curve up to thirty years with regular auctions of securities. The bench mark is being used
by other markets for pricing and valuation purposes The Indian yield curve today compares well with peers in
emerging economies as well as the developed world.
Institutional arrangements for debt management

Institutional arrangements for sovereign debt management play an important role in the debt market. With
regard to the location of sovereign debt management functions, multiplicity of arrangements exists around the
world: in the ministry of finance, central bank or autonomous debt management agency. Cross country
experience shows that there is no international best practice and the adoption of any particular model could
depend on country specific circumstances.

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In the nineties, several OECD countries entrusted debt management to separate agencies with the objective of
providing monetary policy independence to central banks in order to enable them to concentrate on inflation
management. It was also perceived that independent DMOs would improve operations of debt management
through improved accountability and professional debt management. The Reserve Bank of India (RBI) has
been entrusted with public debt management by statute, especially debt denominated in the domestic
currency. In line with the global trends in early years of this century, the Government of India has announced
that a separate debt management agency would be statutorily created to take over debt management from the
Central Bank.
There is a strong view that the issue of separation of debt management from Central Bank needs to be
revisited, especially in the wake of global financial crisis and taking into account the Indian context. In India,
the Fiscal Responsibility and Budget Management (FRBM) Act 2003, which has precluded RBI from
participating in the primary auction of the Government bonds, has resolved the perceived conflict of interest
with the monetary policy. Further, monetary signalling in India is currently done by the repo rate (i.e., the
policy rate) under the Liquidity Adjustment Facility (LAF) and not through the bond yields which are market
driven. In India, the Reserve Bank of India has recognized the paramount importance of inflation
management and has taken all the steps necessary in this regard. The Reserve Bank of India has increased
policy rate on several occasions in the past couple of years in spite of substantial increase in government’s
market borrowings. In spite of heightened uncertainty and volatility in financial markets, the Reserve Bank
was able to complete the significantly increased size of the Government’s borrowing Debt management is
much more than a mere resource raising exercise especially in a developing country context like ours. The
size and dynamics of government market borrowing has a much wider influence on interest rate movements,
systemic liquidity and credit growth through crowding out and an autonomous DMO, driven by specific
objectives exclusively focusing on debt management alone, may not be able to manage this complex task
involving various trade-offs. Internationally, the experience of coordination mechanisms between DMO and
central bank, which are vital for economic management, are far from satisfactory and impacted debt
management. There has been instances of failed auctions, e.g., in UK (March 2009), causing reputation risk
for both the authorities. Mandatory policy coordination by way of statute may not be operationally effective
as management of debt and money/liquidity requires seamless, continuous and ongoing coordination. In the
above backdrop, particularly given the large size of the market borrowings in India due to persistence of high
fiscal deficit, there is infect a confluence of interest between monetary policy and debt management in India.
Internationally, there is rethinking on the issue of debt management by central banks, with scholars like
Charles Good hart articulating that debt management being a critical element in the overall conduct of
macroeconomic policy, central banks should be encouraged to revert to their role of managing the national
debt. There is, thus, a compelling need for wider debate on this issue of governance structure for public debt
management, particularly in countries with high fiscal deficit instead of unbridled faith in the pre-crisis
theology of “independent” debt management office (DMO).
Fiscal prudence
Fiscal prudence is a virtue that needs to be cultivated for effectively managing public finances. It is also an
attribute that facilitates state to borrow at reasonable cost. Recent experiences of some Euro zone sovereigns
underscore this fact. In India, the importance of fiscal consolidation is recognized and legally enshrined in
FRBM legislation. Though there have been slippages with regard to targets in wake of global financial crisis
and its aftermath, the Government has reaffirmed its commitment to fiscal consolidation. The medium-term
fiscal policy statement of the Central Government has given the rolling targets for fiscal consolidation.
The state as an issuer must be sensitive to the requirements of the other sectors of the economy while raising
resources from the matter. Due to its status as issuer with highest credit quality and ability to find captive

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investors, there is always a possibility of crowding out private investment. In, India; the government’s
issuance is planned in a manner so as to take care of the credit needs of the private sector. This is, for
example, achieved by frontloading the borrowing in first half of the fiscal year when credit demand from
private sector is lower.
Provider of high-quality collateral

State, through its issue of debt securities, provides safe and liquid assets which, from the perspective of
conservative investors, act as a store of value or type of insurance during financial distress. For institutions
like banks, these safe assets are useful for asset-liability management and as collateral to raise resources for
funding need. This function of debt securities is also essential for development of debt markets.
Developer of debt market

In an emerging market economy like India, market development also needs to be consistent with the objective
of maintaining financial stability. The prerequisites for establishing an efficient debt market include sound
fiscal and monetary policies, effective legal and tax systems, and a vibrant financial system with competing
intermediaries and adequate infrastructure. Against the above backdrop, the development process of bonds
market has to take into account the legal structure, institutional framework, and market infrastructure.
Legal framework
The legal framework is one of the major or one could say, the most important prerequisite for orderly
development of debt markets. In fact, putting in place the legal framework for empowering government to
borrow, role of central bank as agent for the government, the debt management framework for enforcement of
creditor's rights, enforcement of contracts, rules governing issuance of government securities, and rules
pertaining to the secondary market, creation of appropriate regulatory framework for debt securities is
essential for bonds markets. In case of India, a well-developed bouquet of laws such as RBI Act, Law of
Contract, Securities Contracts (Regulation) (SCRA) Act, Government Securities (GS) Act, Payment and
Settlement Systems Act, Depositories Act, etc. define the legal framework for debt markets. The RBI Act has
made it incumbent upon RBI to manage the public debt and also on Government to entrust public debt
management to RBI. SCRA Act governs all the contracts (transactions) in securities including Government
securities. The GS Act applies to Government securities created and issued, whether before or after the
commencement of the Act, by the Central or a State Government. This Act is aimed at facilitating widening
and deepening of the Government securities market and its more effective regulation by the Reserve Bank in
various ways.
Institutional framework
Institutional framework includes building up of various institutions viz., regulator, primary dealers and
market makers, central counter parties (CCPs), etc. The primary dealers (PDs)’ network is paramount for the
development of the primary segment of the Government bonds markets wherein Government issues the
bonds to finance its gross fiscal deficit (GFD). The PDs are financial intermediaries, which agree to perform
certain obligations or responsibilities in the Government bonds market subject to availability of some
privileges (such as payment of underwriting commission, availability of liquidity from the Central Bank,
etc.). PDs also perform the role of market maker in Government bonds market, which is essential part of the
chain for development of any financial market as they provide liquidity through giving quotes for both buy

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and sell of the financial assets. Against the above backdrop, PDs’ role in the Government bonds market could
be categorized as (I) a financial intermediary between debt manager and investors in the primary market
through participating in the auction; (ii) to provide liquidity both in primary and secondary markets; (iii) to
provide market making services by willing to hold inventories of Government bonds; (iv) to promote efficient
price discovery through aggressively participating both in primary and secondary market; and (v) to create
awareness and educate investors about Government bonds. Most of the advanced countries have primary
dealers’ network, though the model varies from country to country.
In India, PDs network was set up in 1996 with the objectives of supporting the market borrowing programme
of the Government, strengthening the securities market infrastructure and improving the secondary market
liquidity in government securities. Thus, PDs, besides discharging the role of financial intermediary and
market maker, have to compulsorily underwrite the Central Government’ bond issuances in the primary
market. Presently, we have 21 PDs, out of which 8 are companies (called stand-alone PDs) and 13 are
commercial banks. To discharge their obligations effectively, PDs have been given privileges in terms of
provision of current account and SGL facilities with the Reserve Bank. They also have access to the liquidity
adjustment facility (LAF) of the Reserve Bank. In order to ensure that primary dealers bid aggressively and to
discourage defensive bidding, the stipulation of a success ratio of 40 per cent of bidding commitments is
mandated. The PD system was revamped to ensure a more dynamic and active participation of PDs in view of
the provisions of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 whereby the Reserve
Bank was prohibited from participating in the primary market effective April 1, 2006. A new incentive
structure in the underwriting auctions has been put in place to ensure 100 per cent underwriting and to elicit
competitive bidding from PDs.
Market infrastructure
Establishing infrastructure to facilitate clearing and settlement of Government securities and corporate bonds
including central depository and a safe and sound payment system is an important pre-requisite. The market
infrastructure essential for development of the bonds market, inter alia, include trading/ auction platform,
payments and settlement system, and depository. As these facilities require huge investments, state plays a
‘trail blazer’ role in establishing the same. Trading platform could be in the form of over-the-counter (OTC)
or exchange. To improve the facilities for trading and settlement in the Government securities market, an
electronic Order Matching trading module for Government securities has been provided by Reserve Bank of
India on its Negotiated Dealing System (NDS-OM). The platform is an anonymous order matching system
with straight-through processing (STP) ensuring participant anonymity, price transparency and transaction
efficiency. This facility has enhanced trading volumes. In order to improve retail participation, web-based
platform both for primary and secondary markets have launched recently and trade volume on secondary
market web-based platform has been significant.
A fast, transparent and efficient clearing and settlement system constitutes the basic foundation of a well-
developed Government bonds market, while depository enables holding of in dematerialized form catalysing
the payments and settlement process. In India, CCIL was established with regulator’s initiative to act as the
clearing house and as a central counterparty through novation for transactions in government bonds. The
establishment of CCIL has ensured guaranteed settlement of trades in government securities, thereby
imparting considerable stability to the markets. Through the multilateral netting arrangement, this mechanism
has reduced funding requirements from gross to net basis, thereby reducing liquidity risk and greatly
mitigating counterparty credit risk. All transactions in government securities concluded or reported on NDS
as well as transactions on the NDS-OM have to be necessarily settled through the CCIL.

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Recognizing the importance of the financial market infrastructure and our commitment to adhere to the
international best practice, we endeavour to benchmark our institutions and practices. The CCP in India has
been evaluated for governance and risk management by domestic and international auditors. Further, FSAP
has also evaluated the CCP and found the system to be robust. In this regard, it is pertinent to note that CPSS-
IOSCO has published the "Principles for Financial Market Infrastructures" (PFMI) in April 2012 which
updated and reviewed the earlier principles covering (I) core principles for systemically important payment
systems, (ii) recommendations for the securities settlement systems and (iii) recommendations for the central
counterparties, and laid emphasis on credit risk and liquidity risk management. In view of the critical nature
of PFMI, it is essential to do a SWOT analysis of the FMI risk management, rule and regulations. We have
asked the CCP to undertake self-assessment of compliance of the “Principles for Financial Market
Infrastructures" (PFMI) finalized by CPSS-IOSCO in April 2012. The self-assessment is being evaluated by
us. It is essential that periodic assessments may be conducted in view of importance of these institutions for
systemic stability.
In India, the central bank acts as registrar and depository of government securities. Dematerialized holding of
government securities in the form of Subsidiary General Ledger (SGL) was introduced to enable holding of
securities in an electronic book entry form by participants. The Delivery versus Payments (DvP) system in
India was operationalized in 1995 to synchronise transfer of securities with cash payments, thereby
eliminating settlement risk in securities transactions. The DvP system, which was initially on the basis of
gross settlement for both securities and funds (DvP–I method), shifted to DvP-II method where settlement for
securities was on a gross basis but settlement of funds was on a net basis. Both funds and securities are
settled on a net basis (DvP-III method) since 2004. Each security is deliverable/ receivable on a net basis for
a particular settlement cycle and securities are netted separately for SGL and CSGL transactions. Netting of
funds is done on a multilateral basis.
Other financial products

Although all the institutions have critical role to play in the development of the bond market, regulator has
got unique responsibility of regulation as well as introduction of various interest rate products which are
catalyst for improving liquidity and depth the bonds market. New instruments like Floating Rate Bonds
(FRBs), Cash Management Bills (CMB) and Separate Trading of Registered Interest and Principal of
Securities (STRIPs) have been introduced in the debt market to provide investors choice to manage their
portfolios. In India, Reserve Bank of India, the Central Bank regulates the fixed interest rate markets
including Government bonds market and it has enabled introduction of interest rate products viz., interest rate
swaps (IRS), and interest rate futures (IRF) which gave fillip to the development of the underlying
Government bonds market.
The corporate bonds market in India has made some progress in the recent past but activities as compared to
the Government bonds markets continue to be benign. However, the government, RBI and the securities
market regulator (Securities Exchange Board of India) have taken several measures to improve the activities
in the corporate bond’s markets. These measures, inter alia, included launching reporting platform for post-
trade transparency; DvP in settlement of OTC trades to eliminate settlement risk; transitory pooling of
accounts for settlement of corporate bonds in the books of the Reserve Bank of India allowing repo in
corporate bonds to provide avenue for funding; introduction of Credit Default Swaps to facilitate hedging of
credit risk by the holders of corporate bonds; and increasing limit of foreign institutional investors (FIIs) to
USD 25 billion. As a consequence of these measures, net issuance of corporate bonds amounted to Rs. 1,621
billion during 2011-12, raising the outstanding corporate bonds to Rs. 10,516 billion on end-March 2012. The
secondary market trading volumes in the corporate bonds market increased from Rs. 959 billion in 2007-08
to Rs. 5,938 billion during 2011-12.

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Market access
There is merit in the fact that improved access to debt markets will facilitate financial inclusion. For the
issuer, it provides opportunity to tap a wider investor base and for investors, it would provide additional
avenues of investment. Notwithstanding the predominantly institutional character of the G-Sec market,
Reserve Bank of India has recognized merit in promoting retail participation and has initiated certain policy
measures such as “Scheme of Non-competitive Bidding” for participation in auctions, improving access to
the market for mid-segment investors by permitting well-managed and financially sound Urban Cooperative
Banks (UCBs) to become members of NDSOM and revision of authorization guidelines for the Primary
Dealers (PDs) mandating achievement of minimum retailing targets. To ease the process of investment by
retail/mid-segment investors, a web-enabled platform which would seamlessly integrate their funds and
securities accounts has also been provided.
Enhancing liquidity
Liquidity in debt markets is essential as it offers the comfort to the investors in terms of ease of transaction,
helps issuers as liquidity makes financial instruments attractive investments and is also critical for the
effectiveness of the monetary policy transmission. The state can improve liquidity by accessing the market
regularly, building up volumes in benchmark issuances and pursuing an active buy-back programme. The
market liquidity is also impacted by the risk preferences of the market participants, their ability to run short
positions and the development of funding markets (such as repo markets) allowing them to take positions in
the debt markets.
The Reserve Bank had recently constituted a Working Group on “Enhancing Liquidity in G-Sec and Interest
Rate Derivatives Market” (Chairman: R. Gandhi). The major recommendations made by the Group, which
submitted its report recently, with regard to improving liquidity in G-Sec are:
 To consolidate the outstanding G-sec, for which a framework may be prepared for the next 3-4 years,
beginning with the issuance of securities at various maturity points in conjunction with steps like
issuance of benchmark securities over a longer-term horizon, buybacks and switches, etc;
 To come up with a roadmap to gradually bring down the upper-limit on the Held to Maturity (HTM)
portfolio. While doing so, the possible impact of reduction in the limit on HTM classification on the
balance sheet of banks/PDs and any measure aimed to address this issue should be calibrated
appropriately to make it non-disruptive to the entities and other stakeholders;
 To enable market making, allocation of specific securities to each PD and if required, rotation of the
stock of securities among the PDs, by turn, at periodic intervals may be considered;
 To encourage alternate investors, investment limit for FIIs in g-sec may be increased in gradual steps.
The increase in the investment limit can be reviewed on a yearly basis keeping in view the country’s
overall external debt position, current account deficit, size of GoI borrowing programme, etc.
Measures to simplify access for investors like trusts, corporates etc. to the gsec market may be
examined and long-term gilt funds may be encouraged through appropriate incentives (like tax-
breaks, liquidity support, etc.);

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 To improve repo markets, the restrictions on selling/repo of securities acquired under market repo
may be reviewed to promote the term-repo market with suitable restrictions on ‘leverage’ and
consider introducing an appropriate tripartite repo in g-sec;
Related markets
Debt market development is also dependent on development of related markets viz. money markets, repo
markets and derivatives markets as these markets provide funding avenues and risk management tools.
Reserve Bank made conscious efforts to develop an efficient, stable and liquid money market by creating a
favourable policy environment through appropriate institutional changes, instruments, technologies and
market practices. Call money market was developed into primarily an inter-bank market, and other market
participants were encouraged to migrate towards collateralized segments of the market, thereby increasing
overall market integrity. Necessary market infrastructure in form of safe trading and settlement system was
developed. These measures enhanced the efficacy of funding markets and in turn improved trading in debt
markets.
Widening the investor base

The countries that aim to widen investor-base and promote debt market liquidity look to encourage foreign
Investors’ participation in domestic securities markets. FIIs, by being global players, can provide much
needed diversity of views in the market. However, the uncertainty and volatility attached to these
investments, as seen in different countries during various crisis leads to concerns on capital flows.
Accordingly, in India, FII investment in debt securities is restricted (subject to an overall cap) and the same is
reviewed from time to time. The policy is oriented towards providing calibrated access keeping in view the
potential benefits as well as possible effects of sudden exit of investors on capital flow and on market
volatility.
Regulator of debt markets

The role of the regulator in is to address systemic stability issues and also support market development
through regulation and supervision. Asymmetries in information (and also expertise, resources and power)
between market participants, and the externalities stemming from the failure of financial agents to live up to
their contractual obligations create a need for public regulation and supervision of markets and financial
institutions. The issue of information asymmetry can be addressed through stipulating accounting and
disclosure standards as well as regulatory reporting system. Emphasis of regulatory intervention lies in
correcting market failures and dealing with externalities and distortions that prevent financial markets from
developing. The key tasks for the regulator are development of an early warning system to detect systemic
weakness and creation of a robust regulatory/supervisory framework. While it is desirable to allow market
participants to trade and express their views, it is imperative to remain focused on financial stability needs.
In India, the Reserve Bank of India, as regulator of government bond market, has followed a calibrated
approach. Leverage in repo markets is managed by not allowing resale of reposed security by the lender of
funds. Intraday short selling in G-Sec, which was permitted in 2006, was extended to five days in 2007 and
up to three months in 2011. Activity in short selling is restricted to banks and PDs. Further, participant-level
quantitative limits have also been prescribed on the amounts that can be short sold to obviate risk of ‘squeeze’

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in the securities and to cap the overall risk in the market. Short-sale positions are reported and monitored to
ensure that the risk is limited. The Reserve Bank follows a dynamic approach to regulation and review the
limits based on the development of the markets and risk management capabilities of the market participants.
There is a need to ensure that disclosure standards embody the right incentives for all concerned and there is
coordinated adoption of such standards. For instance, Reserve Bank of India has amended the repo
accounting guidelines to reflect economic essence of the transaction, i.e., borrowing and lending of funds and
avoid pitfalls like ‘Repo 105’ of Lehman Brothers.
The rationale for the regulatory framework for debt market is to have oversight over the securities markets
and its professional participants so as to promote public confidence in securities and debt markets, provide
basic investor protection (protect investors from fraud and manipulation) essential for creation of fair,
efficient and orderly markets, protect the stability of the financial system by preventing failures in the market.
The focus needs to be on market integrity and transparency. The need of the hour therefore is “right”
regulation and not “less” or “more” regulation. In the context of recent developments following the global
financial crisis, it is imperative that the regulator strikes a balance between financial innovation and systemic
stability. Complex financial products need to be evaluated in relation to their usefulness to sustainable market
development. For example, in Indian context, the innovation in government bond trading through a screen-
based anonymous order matching system (NDS-OM) has been dovetailed under a Straight Through Process
(STP) to the CCP (i.e., the Clearing Corporation of India Ltd) for mandated guaranteed settlement.
Reserve Bank has enabled a regulatory reporting structure which enhances transparency and improves
disclosure. Nearly all the transactions in debt and derivatives in fixed income markets and money markets are
reported. The market participants are regulated entities and this imposes market discipline. It has entrusted
the market body, the Fixed Income Money Market and Derivatives Association of India (FIMMDA), with
quasi-SRO responsibilities relating to formulation of model code of conduct for market participants,
accreditation of brokers in the OTC interest rate derivatives market and also in arbitration between the market
participants.
Concluding remarks
Importance of debt markets to the economy and the critical role state, meaning both the government and the
central bank, plays in developing these markets are now well appreciated. In its three roles: as issuer,
developer and regulator, state could influence the trajectory of progress of the debt markets. Investors’
confidence in the quality, safety and integrity of the public debt management is the pre-condition for the
development of the Government bonds market and credible DMS is one of the important factors that create
this confidence. DMS, however, should follow some intuitive guidelines, especially in order to improve depth
and breadth of the government bonds market and these guidelines should favour cost minimization over
medium term subject to prudent degree of risk, a stable mix of borrowings in domestic and foreign currency,
issuance of variety of instruments (fixed rate bonds, floating rate bonds, inflation indexed bonds, bonds with
call and put options, etc.) to cater to investors’ interest and active consolidation of outstanding securities
through buybacks and switching operations for enhancing liquidity in the market. Benchmark yield curve
which serves as the risk-free rate for the pricing of other securities needs to be developed. For developing a
credible yield curve, a programme of regular issues at the appropriate maturities needs to be devised.
Institutional arrangements for sovereign debt management play an important role in the debt market. Cross
country experience in this regard shows that there is no international best practice and the adoption of any
particular model could depend on country specific circumstances. Debt management is much more than a
mere resource raising exercise, especially in a developing or emerging country. As the size and dynamics of
government market borrowing has a much wider influence financial markets, an autonomous DMO, driven

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by narrow mandate of exclusive focus on cost effective debt management alone, may not be able to manage
this complex task. Given the large size of the market borrowings in many countries, there may be a
confluence of interest between monetary policy and debt management, as is the case in India.
The prerequisites for a developed and efficient debt market would include effective legal and tax systems,
institutional framework and a free & fair financial system with competing intermediaries and adequate
infrastructure. Legal framework for empowering government to borrow, the debt management framework for
enforcement of creditor's rights, rules governing issuance of government securities and secondary market
trading are essential for safe and sound bond markets. Institutional framework would include building up of
various institutions viz., regulator, primary dealers (PDs) and other market makers, central counter parties
(CCPs), etc. Establishing efficient and safe market infrastructure to facilitate issuance and trading of
government securities, clearing and settlement of Government securities and corporate bonds including
central depository is equally critical for development of the bonds market.
State as the regulator has to address systemic stability issues and also support market development through
regulation and supervision. Regulation needs to focus on correcting market failures and dealing with
externalities and distortions that prevent financial markets from developing by striking a balance between
financial innovation and systemic stability. The regulator’s role assumes importance in developing an early
warning system to detect any weakness in financial system and creation of a robust regulatory/supervisory
framework to deal with such weaknesses.
I hope the above exposition primarily based on Indian experience on role of state in developing debt market,
particularly the government bond market, would provide some useful learning points for emerging countries
like Qatar. I once again thank the Qatar Central Bank and the International Monetary Fund for giving me this
opportunity of sharing our experience with such a distinguished audience.
2.4. Techniques of Debt market Management

Many techniques have been suggested by economists to achieve the objectives of debt management.
We discuss below a few practical and important techniques:
1- Lowering the Interest Cost
2- Changing the Maturity Structure
3- Advance Refunding
1.Lowering the Interest Cost:

The most important objective of debt management is that the interest cost of the public debt to the
government should be low so that the burden of servicing the debt should be the minimum to the taxpayers.
The government repays the debt by raising revenues from taxation.
The higher the cost of servicing the debt, the higher would be the level of taxation and the greater the burden
on taxpayers. The government should so work out the pattern of interest rates that it conforms to the
preference pattern of security holders. The lower the interest rates on government securities, the smaller will
be the transference of resources from the taxpayers to bond holders.

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In practice, most governments keep very low interest rates on short-term securities and gradually increase the
interest rates as the maturity period of the debt lengthens. This method gives rise to wide spreads between the
short-term and long-term interest rates. This induces bond holders to switch over from short- term to long-
term securities thereby increasing the debt burden of the government and imposing a higher tax burden on the
taxpayers.
2.Changing the Maturity Structure:

One of the techniques of debt management is to change the maturity structure of the debt as a device for
economic stabilisation. This is done by “swapping operations” by the central bank. During boom period, the
central bank sells more long-term government securities in the open market and purchases a corresponding
amount of short-term government securities with the same amount of money.
This lengthens the average maturity structure of the existing public debt which tends to raise the interest rate.
Since long-term securities are not good substitute for money, they increase the liquidity preference. As a
result, the liquidity preference curve will shift to the left from LM to LM1This raises the equilibrium interest
rate from OR to OK, and reduces the equilibrium income from OY to OY1, as shown in Fig. 4. The rise in the
long-term interest rate would curb private spending by reducing availability of credit.
The value of outstanding assets of financial institutions is also reduced with the increase in interest rate. They,
therefore, tend to hold more liquid short-term government securities. This is likely to cause a rise in the short-
term interest rate.
If the short-term interest rate rises slightly, financial institutions will tend to hold more short-term
government securities rather than cash. Thus, reduction in the availability of credit and holding of more short-
term securities will have a tendency to control a boom.
On the other hand, debt management requires the shortening of the average maturity structure of the
outstanding public debt through the sale of short-term government securities to replace them by purchasing
long-term government securities during a recession. This would tend to bring a sharp fall in the long-term
interest rate accompanied with a mild fall in the short- term interest rate. Since short-term securities are a
close substitute for money, the asset holders tend to substitute them for money.
This will reduce the liquidity preference and shift the LM curve to the right from LM to LM2 with a lower
equilibrium level of interest rate OR2 and a higher income level OY2, as shown in Fig. 4. Thus, debt
management requires the manipulation of the term structure of the debt to bring about economic stability.
3.Advance Refunding:

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Another method of lengthening the public debt is to advance refunding of securities. The central bank offers
the holders of a particular long-term government security, which still has some years to mature, to exchange
their securities for a new security with a longer maturity.
The new security carries a little higher yield and the holders of the old security do not realise any capital loss
or gain. This technique has the advantage over the other techniques described above in that the central bank is
not required to resort to open market operations for managing the public debt.
Debt management leads to a number of problems which should be tackled in co-ordination with monetary
and fiscal policy. A large size of public debt is likely to siphon off funds from the capital market. This reduces
the availability of credit in the capital market and raises the interest rate.
This is likely to increase the burden of public debt to the government and makes investors feel that they
would suffer a capital loss. Moreover, any holding of public debt by the central bank correspondingly
increases the cash holdings of commercial banks.
The banks, in turn, make a multiple expansion of their deposit liabilities which leads to inflationary pressures
in the economy. Further, fluctuations in the demand, supply and prices of government securities during
booms and recessions tend to increase the severity and longevity of booms and recessions.
For this, the central bank should be ready to purchase or sell government securities in the open market in
order to bring upward or downward pressure on interest rates for economic stabilisation and to minimise the
interest cost of the debt to the government.
Similarly, the government should resort to fiscal policy so as to manage the public debt effectively. A budget
surplus is used as a fiscal device during boom periods. A surplus budget acts in a deflationary manner upon
the money supply and bank reserves. A budget surplus means that the government revenue is more than its
expenditure. It involves reduction of money in the hands of taxpayers who are levied heavy taxes.
This leads to a reduction in the deposits of the public with the commercial banks which, in turn, reduces the
reserves of commercial banks. As a result, their reserves with the central bank are reduced. This leads to the
reduction in the spendable money with the government. This makes the retirement of public debt held by the
central bank difficult. This goes against the commonly held view that a budget surplus can be used for the
retirement of public debt held by the central bank.
Despite this, coordination between monetary and fiscal policies is essential on a regular basis because of the
frequent debt refunding operations of the central bank. When government securities mature, it is the central
bank which is required to refund them on behalf of the government.
At the same time, the government has to follow a surplus budgetary policy to retire the public debt. But this
policy is deflationary in nature and requires to be controlled by an appropriate anti-deflationary monetary
policy.
If the government adopts a deficit budgetary policy for debt retirement, it would be inflationary in nature
which is again required to be controlled by an appropriate anti-inflationary monetary policy. Thus for an
effective debt management, there should be a close coordination between monetary, fiscal and debt
management policies.
2.5. METHODOLOGY OF DEBT MARKET
The debt market of a country performs some important functions and helps in the process of economic
development of the country. We know that the debt market is the market for medium-term and long-term
financial assets. It deals in securities having a maturity period of 1 year and above.

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It supplies funds for financing fixed capital requirements of firms as well as long-term requirements of the
government for funds. By its activities, the debt market of a country makes a considerable contribution
towards the process of its economic development. This will be clear if we mention the major functions of the
debt market of an economy.
The important functions of the debt market may be summarized as follows: Trade and industry of a country
require funds or liquidity for their expansion. The debt market provides medium-term and long-term funds
for the development of trade and industry. It thus acts as a provider of liquidity.
For economic development, small savings of the country should be mobilized first. The debt market
mobilizes small savings scattered over the country through its various institutions. It thus collects much-
needed funds required for the economic development of a country.
Mere mobilization of savings is not enough. The mobilized savings are to be properly invested. The debt
market arranges proper investment of the funds collected from the savers. It thus makes an efficient allocation
of resources.
The debt market protects the interests of both the savers and the investors. It thus helps increase the
propensity to save of the savers and propensity to invest of the investors. The debt market helps in selling the
securities of government enterprises and autonomous bodies.
It thus provides the much-needed funds to the government and the autonomous bodies who are important
agents in the process of economic development of a country.
On the one hand, the debt market opens new opportunities for investment and thus keeps the savings of the
economy mobile. On the other hand, it encourages savings, raises the rate of savings and thus helps in the
economic development of the country.
In the debt market, some special purpose development financial institutions provide financial help to some
targeted sectors. Some of them provide financial help to small and cottage industries. They thus help in the
process of economic development of a country.
Credit rating agencies of the debt market provide superior, low-cost information to the investors about their
investment. These agencies ensure optimal uses of investible funds. By providing investment information,
credit rating agencies increase the propensity to invest of the investors and thus help in the economic
development of a country.
2.6. TYPES OF METHODOLOGY OF DEBT MARKET
1- Concept of the broken period interest as regards the Debt Market
2- The conventions followed for the calculation of Accrued Interest
3 -The Clean Price and the Dirty Price in reference to trading in G-Secs
4. The Face Value, Trade Value and the settlement value different from one another
5. Investors in India hold G- Secs
6. Types of transactions which take place in the market

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7. Role of the Exchanges in the WDS
1. Concept of the broken period interest as regards the Debt Market
The concept of the Broken period interest or the accrued interest arises as interest on bonds are received after
certain fixed intervals of time to the holder, who enjoys the ownership of the security, at that point of time.
Therefore, an investor who has sold a bond which makes half-yearly interest payments three months after the
previous interest payment date would not receive the interest due to him for these three months from the
issuer. The interest on these previous three months would be received by the buyer who has held it for the
next three months only but received interest for the entire six-month period, as he happens to be holding the
security at the interest payment date.
Therefore, in case of a transaction in bonds occurring between two interest payment dates, the buyer would
pay interest to the seller for the period from the last interest payment date up to the date of the transaction.
The interest thus calculated would include the previous date of interest payment, but would not include the
trade date.
2. The conventions followed for the calculation of Accrued Interest
The Day Count Convention to be followed for the calculation of Accrued Interest in case of transactions in G-
Secs. is 30/360, i.e., each month is to be taken as having 30 days and each year is to be taken as having 360
days, irrespective of the actual number of days in the month. So, months like February, March, January, May,
July, August, October and December are to be taken as having 30 days.
3. The Clean Price and the Dirty Price in reference to trading in G-Secs
G-Secs. Are traded on a clean price (Trade price), but settled on the dirty price (Trade price + Accrued
Interest). This happens, as the coupon payments are not discounted in the price, as is the case in the other
non-govt. debt instruments.
4. The Face Value, Trade Value and the settlement value different from one another
The Cumulative face Value of the securities in a transaction is the face Value of the Transaction, and is
normally the identifiable feature of each transaction. Say, a transaction of Rs.500,000 worth of G-Secs will
comprise a trade of 5000 G-Secs. Of Rs.100 each. The Trade value is the cumulative price of the traded G-
Secs (i.e. no. of securities multiplied by the price) Say, the G-Secs referred to Above may be traded at Rs.102
each so that the Trade Value is Rs.5,10,000 (102 x 5000). The Settlement value will be the trade value plus
the Accrued Interest. The Accrued Interest per unit of the Bond is calculated as = Coupon of Bond x Face
Value of the G-Sec. (100) x (No. of Days from Interest Payment Date to Settlement Date)/360. In computing
the number of days between the Interest Payment Date and the Settlement Date of the trade, only one of the
two days is to be included.
5. Investors in India hold G-Secs

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

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Secs. Can be held in either of the following forms:
 Physical Security (which is mostly outdated and 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 the RBI, are meant only for client holdings.
 Same Demat A/c as is used for equities at the Depositories. NSDL and CDSL will hold them in their
SGL-II A/cs of the RBI, meant only for client holdings.
6. Types of transactions which take place in the market
The following two types of transactions take place in the Indian markets:
Direct transactions between banks and other wholesale market participants which account for around 25% of
the Wholesale Market volumes: Here the Banks and the Institutions trade directly between themselves either
through the telephone or the NDS system of the RBI.
Broker intermediated transactions which account for around 70-75% of the trades in the market. These
brokers need to be members of a Recognized Stock Exchange for the RBI to allow the Banks, Primary
Dealers and Institutions to undertake dealings through them.
7. Role of the Exchanges in the WDS

BSE and other Exchanges offer order-driven screen-based trading facilities for Govt. Securities. The trading
activity on the systems is, however, restricted with most trades today being put through in the brokers’ offices
and reported to the Exchange through their electronic systems which provide for reporting of "Negotiated
Deals" and "Cross Deals".

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CHAPTER 3
LITERATURE REVIEW

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3.1. Introduction
The Indian capital market, for equity and corporate debt, also dates back to colonial period with the
establishment of the first stock market in India in Bombay in 1857. During the colonial period, many Indian
firms adopted debentures as a source of financing (Roy, 2000). In 1991, the pricing of new issues was freed
from restrictions, along with relaxation of the restrictions on firms to approach the capital market for the
funds. In 1992, the government allowed Indian firms with good track record to issue debentures in foreign
capital markets. In the post 1991 period, there was some growth in the bond market with the introduction of
many new and innovative types of bonds (Sen and Vaidya, 1997). In the presence of information asymmetry,
banks and financial institutions are expected to be more effective in monitoring than the arm’ length lenders.
As private debt holders are likely to be more informed through monitoring and screening, and private debt is
usually senior to public debt in terms of repayment order (Welch, 1997), it would be safer than the arm’ s-
length debt. The literature, as applied to financial markets, has emphasized the advantage of monitored debt
such as bank borrowing in reducing informational and monitoring costs as compared to effortlessly accessible
debt (Rajan, 1992). In fact, this presence of bureaucratic lethargy in state-owned financial institutions has
been noted in previous studies, which have found that countries with higher government ownership of banks
are associated with lower financial development and lower growth of per capital income and productivity and
that the lending behaviour of state-owned banks is politically determined (La porta, Lopez-de-Silanes and
Shleifer, 2002; Sapienza, 2004).
The research on debt market has focused more on pure government/public sector debt rather than private
sector/corporate debt. Primary debt market in India includes Issuers such as large private sector corporate,
public sector, financial institutions, banks and medium and small companies. Instruments include partly
convertible debentures (PCDs), fully convertible debentures (FCDs), deep discount bonds (DDBs), zero
coupon bonds (ZCBs), bonds with warrants, floating rate notes (FRNs) / bonds and secured premium notes
(SPNs), where the coupon rates depend on tenure and credit rating. The determinants of government debt
market activity are macroeconomic stability and political factors (Persson and Tabellini 1999, Reinhart et al
2003, and Claassen’s et al 2007). The research on private sector/corporate debt usage have focused on the
conditions in which firms prefer debt to bank financing versus equity and finally bankruptcy costs in presence
of increasing levels of debt, lowering of their credit rating and rising coupon rates on new debt. It included
identifying the determinants of a company‟ s capital structure to understand companies ‟ reluctance to issue
debt and equity or mix. Aguilar et al (2006) found that firm size influenced its participation in the bond
market and only large firms participate in the bond market, and that the debt market was concentrated with
short Vol-1 Issue-3 2015 IJARIIE-ISSN (O)-2395-4396 1211 www.ijariie.com 94 term debt as compared to
long term debt. Harris and Ravi (1991) provide evidence that leverage increased with fixed assets, non-debt
tax shields, investment opportunities and firm size, and increases with volatility, the probability of
bankruptcy, profitability and the uniqueness of the product (Leal and Carvalhal-da-Silva 2006). Fernandez et
al (2006) postulate that the value of a firm is not empirically independent of its financing policy and,
therefore, the conditions for the Modigliani-Miller theorem were not satisfied. Capital structure for firms in
general have been investigated by various authors (viz., Fisher et al, Bradley et al, Brennan et al, Ferris et al
etc.). The relationship of debt ratio was inversely related with past profitability is also confirmed by Rajan
and Zingales (1995) and Titman and Wessels (1998). Shyam-Sunder and Myers (1999) tested the theory over
the period 1971-1989 on a sample of 157 firms. And confirmed the time-series explanatory power.
Bontemps (2002), based on a sample of Italian firms, divided companies into trade off and pecking order
types; there is not a perfect model that can be used for all the firms. Similar conclusions are supported by
Ghosh and Cai (1999), Franz and Goyal (2003). Ennis and Male (2005) suggest that company ‟ s size could
be used as a negative indicator of probability of default and therefore as a proxy for risk. Rajang and Zingales
(1995) firm size were positively correlated with leverage, Fame and French (2002) argue that, because of
their level of diversification, larger firms were expected to have less volatile earnings induce a higher

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leverage ratio. Harris and Ravi (1991), discovered that leverage increases with firm size and also Desi` and
Robertson (2003) using both a static model and a dynamic model had similar results. For earlier work on the
corporate debt market in India, see Mohan (2000), Thorat (2000, 2002), Leonardo (2000) and Patil (2004).
Whether the debt market can function as source of financing needs to be examined. The question of
classifying good papers has also not been examined in the literature. The next section proposes a method of
analysis.
In emerging economies debt is the major source of external financing. In early years not have effect on firms
but later on its effect appeared. Debt can be used as expropriation mechanism. Debt governance highlight the
role of ownership. Debt plays disciplinary role in those firms which are over invested. The institutional
changes also have effect on disciplinary role on debt.
The choice of debt and equity when assets evaluation is based on outside value. In this paper asset value
uncertainty has been discussed, the equity holders sell the assets and restructures their capital structure
decisions. Assets which are of high uncertainty decrease the leverage but it does not affect the firm’s value at
all and selling those assets cannot be feasible for the firm. Firms should have to invest in those assets who
cannot be affect with high /low earnings.
Financial development and corporate financing: evidence from emerging market economies. (God Fred A
Bokpin, oct 2008).
Financial market development depends upon the time duration of the securities issued by the firm, they
included long term financing resources as well as short term financing resources also.
Firm level can identify the optimal capital structure. The decision of optimal debt /equity ratio go parallel
with the macroeconomic variables so therefore managers must have to more concern about the development
of the financial markets. Different policies should be made to identify the need of the firm that whether they
go for long term financing or short-term financing. Firms should monitor maturity timing of securities at time
of issuance for the development of macro level and must consider external factors also rather than
considering only internal factors.
Firms issue more debt in hot debt market as compare to cold debt market firms with adverse selection cost
issue more debt in hot debt market firms not balance their leverage without balancing their capital structure
decisions.
Debt has impact on earnings quality but high debt has negative impact on earnings quality of a firm.
The ratio between these two broad areas is positive at lower side and negative is at higher side of debt
employment and infection point is round about 41%. If firms go for high debt, they must have to pay high
borrowing cost and thus reduces the earning quality.
Changes in the debt-to-equity ratios is relevant with the long density function with no convergence moments.
If standard form of debt-to-equity ratios has been employed for the purpose of financial variable so the result
will not be consistent.
Financial market development depends upon the time period of the securities issued by the firm which
includes long term financing as well as short term financing.
Firm level can identify optimal asset mix. The decision of optimal debt and equity ratio go parallel with the
micro financing variable so managers are more concerned about the development of financial markets.
Different policies should make by the managers to identify the need of the firm that whether it go for short
term or long-term financing. Maturity of securities at time of issue must consider and also take into account
the external factors along with internal for the development of markets at macro level.

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If the new born firm go for initial public offerings in the stock market so the growth rate of its sales or the
share price of its shares can effect on the company’ s performance on the stock market. The return on equity
and its market success cannot be measured easily several tests showed same results in this regard and there is
no specific difference between them. New firms with high growth have chances to grow more than that of
established firms. Although stock market good performance required qualitative, well skilled and well-
informed management as well as staff also, innovative firms can perform better so these all resources boost
up the small and new firm performance on stock market.
Maturity timings for the firms who are new is low which unable to pay the debt in the past and also for the
new firm because the default risk for new firms is usually high because they have no experience so lender s
not to trust on them for longer period. Maturity timings are longer for those firms whose owners have
personal assets also to present in case of liquidation. Although short term loans are not suitable for those
projects which not pay off early. Personal wealth plays vital role for long term maturity loans borrowings.
As the firms go bigger and sustain in the economy then maturity is no problem for them.
Intellectual capital play’s vital role to determine the firm value and have impact to the cost of funds they
borrowed. It includes all the resources that determine the value and the competitiveness of any firm. It also
includes all financial statements. It includes physical, financial, human and intangible assets. Firms who
disclose their financial reports on web is the better way to increase value and motivate investors to invest
their money in those firm because they are must informed with the company position from the statements
available on web.
Firms go for equity financing seems to enhance the firm value and the quality because they can minimize
budget constraints through equity capital. Low – tech companies have tangible assets and can easily be turn
into cash and also have relatively sustainable cash flows so they can go for more debt as compare to High-
tech companies have few tangible assets and their profit margin is also not consistent so they must go for
little debt. IPO for low-tech companies is less under-priced than for high-tech firms which are more under-
priced so that management high-tech firms must consider these all reason while going for IPO’ s because
these all reasons are usually ignored and all high-tech and low-tech treated similarly while taking capital
structure decisions.
Government of Pakistan tried to make its banking sector n economy free from interest since 1980 to 2002 but
no specific changes had been seen during these decades. In 2002 although practically work was started on
Islamic banking ideology but these all efforts were not sufficient and the reasons behind them were banks,
Government itself, industrialists and many depositors. They were reluctant about this interest free system
because of their personal benefits but now few banks offering schemes which are free from interest but their
contribution toward this ideology is very little and the economy of Pakistan, the country which came into
being on the name of Islam also following the system which is based on interest. which is forbidden in Islam
strictly so Government should take serious initiative to implement this system properly.
To analyse shareholders earnings in those firms who are particularly dealing in leasing and factoring. The
costs of capital of these firms are usually low so they are on low risk. Different techniques applied on the
financial data of those firm financial data like Net present value, return on equity, weighted average cost of
capital so findings were positive. Companies with best practices compared with worst practices companies
but there were no significant differences but the companies with best practices performing well and also have
low operational costs so they tend to improve the shareholders earnings as compare to worst practices
companies.

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3.2. IMPORTANCE OF REVIEW OF LITERATURE

Nils H. Hakansson (1999):
Postulates a balanced mix of Banking system and Corporate Bond market for making a well-developed
Corporate Bond Market. They opine that a well-developed corporate bond market is associated with greater
accounting transparency, a wide range of corporate debt securities demanding sophisticated analysis and a
large number of financial analysts and credit rating agencies.
Warren Buffet (2002):
However, argues that those who trade on Derivatives stand to earn on the basis of Mark-To-Market, which is
not real. He calls the Derivatives as time-bombs both for the parties who deal with these as well as for the
economy.
R H Patil (2004):
In his literature on corporate debt market has discussed the background of Banks providing long term loans.
The author discusses in the literature the rationale behind the first set of initiatives taken by the Government
and the regulators. The author believes that an average investor is more comfortable to invest in Bonds which
his bank sells over the counter. He suggests that the banks should change its role to become market makers by
providing two-way price quotes at their designated branches. However, in the present context when the
existing banks are saddled with NPA-s and faced with the challenges of BASEL-III norms, implementation of
the suggestion is doubtful and therefore requires further study.
Dr. Ravindra Tripathy et al (2004):
Appreciate the initiatives of RBI and Sebi in developing the debt market in India and emphasize the need for
more such regulatory reforms. The authors identify a number of weaknesses in the Indian debt market that is
responsible for illiquidity in the market. Although they suggest development of infrastructure for increasing
retail investment in the debt market in India, yet there is lack of completeness on the way forward.
M.T. Raju et al (2004):
Identifies three factors for development of the corporate bond market viz. Development of Bond Manager,
Diversity of investors and good quality of papers. The authors view that out of the above three factors, the
second factor is exogenous and the third factor can be achieved in the long run. However, the development of
bond manager can be achieved in the short run. There is a gap in the study in absence of any link established
among the issuer, payment bank and investor.
Frank Hagen stein et al. (2004):
Emphasizes the requirement for a permanent overlay of risk management tools to ensure a risk-adjusted
attractive performance of credit portfolios. The concept is relevant to the construction of innovative
instruments, market infrastructure and emergence of new class of portfolio managers that will fulfil the
expectations of the retail investors in terms of both safety and return.
Eichengreen (2004):
Shows how Asia’s structural characteristics, macroeconomic and financial policies make development of
their corporate bond market different from the rest of the world. He finds that stronger institutions, less
volatility in the exchange rates, large country size and competitive banking sector are positively associated
with bond market capitalization.

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Pipat Luengnaruemitchai and Li Lian Ong (2005):

Suggest that in developed and mature markets the actively traded Derivatives and its hybrid offer a wide
range of choices to the investors for risk management and also they enhance liquidity and price discovery of
the underlying securities. They view that investors’ confidence cannot be instilled by regulations, rather it is
market infrastructure, market integrity, transparency and investor protection which gradually generate
investors’ confidence in the market.
Marvin Good friend (2006):
Emphasized the necessity of a 'spare tyre' provided by the functioning corporate Bond market as resilience
due to any major financial shock. He urges the Government to stabilize the purchasing power of local
currency to enable retail investment in bonds. The author ignores the possible alternatives in the event the
Government fails to hold the currency purchasing power.
Muhammad bin Ibrahim (2006):
States that Malaysia has a very large spare tyre called 'private Debt securities (PDS) market' which is larger
than the local Government bond market.
Chandan Sinha of RBI (2006):
India emphasized the need for transparency for development of the retail bond market in India. The other
obstacles for growth of the market as pointed out by him are bias of household financial savings towards
bank deposits and Government paper. But in the current scenario of low interest rate and reduced fiscal
deficit, the retail participation in the corporate Bond market is almost absent.
Amy Edwards of the US Securities and Exchange Commission (2006):
Observes that after launching of Transaction Price Reporting through TRACE, liquidity improved in the
corporate bond market resulting in lowering of the transaction cost benefitting both the investors and the
regulators.
Sundaresan (2006):
Advocates structural reforms in the Bankruptcy code, investor protection, corporate governance,
transparency, price discovery mechanisms and legal contract enforcement for the development of the
corporate bond market. The study is one-sided and does not reflect on the role of retail segment in the
development of the corporate bond market. Bankruptcy code, though, recently enacted in India, there is little
sign of emergence of a vibrant corporate Bond Market, which suggest further work on the market.
Rakesh Mohan (2006):
Analyses the high cost of issuance of public issues due to rating, listing, disclosures and marketing
requirements. He further mentions that due to high cost of issuance the private placement route is more
popular. He suggests development of market making institutions and marketing networks.
Randall Dodd and Stephany Griffith-Jones (2006):
Concludes that Derivatives market have two economic purposes, 1) Price Discovery and 2) Risk Transfer.
They argue that Derivatives not only help to determine spot prices but also Future Prices. Corporations were
found to prefer options as a means to hedge.
K Ravichandran (2007):

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Observes that the younger generation is willing to invest in the capital Market and that too highly in the
Derivative segment. Even if there is lack of knowledge on Derivatives, they are found to take decisions with
the help of their friends or even brokers. The author argues that the awareness of Derivatives by the investors
help them to reduce risks and also make profit.
Hendrik and William (2008):
Studied the effect of Transparency on the corporate Bond market. They observe that with launch of the
TRACE system in US, the transaction price reporting in the corporate bond market through the TRACE
system gave a major shock to the market dealers of the earlier opaque market, whereas investors are
benefitted by a decline in the buy-ask spread. The authors speaks of rationing the information but ignores the
retail investors’ perspectives.
Stephen Wells and Lotte Schou-Zibell (2008):
Suggest that among the measures required for depth and liquidity in the bond market, the critical measure is
the use of risk management tools and derivatives and swaps which will help reduction in costs, enhancement
in returns and enable investors to manage risks with greater certainty and precision. They recommend the use
of securitization to finance the infrastructural investment and remittance of the cash flows could diversify the
investors’ base for infrastructural debt. The authors appear to be cynic when they opine that the chances of
significant participation of the retail investors in the corporate bond market are unlikely which is in
contradiction to many other views.
Barbara Black (2008):
Emphasizes strengthening of regulatory vigilance, availability of accurate and quality information to the retail
investors, initiative by the regulator for effective investors’ education and competent and consistent
performance by the regulator on proactive basis for restoring retailers’ confidence in the market.
Yesh Pal Davar and Suveera Gill (2009):
Study the antecedents of the households’ investment decision making process. The authors view that an
appealing direction of future research is to gauge the benefits out of the emergence of markets for new
financial instruments such as options, swaps etc. that offers new interesting opportunities to the investors to
achieve financial security.
Vinay Mishra and Harshita Bhatnagar (2009):
Argue that Derivatives markets are an integral part of capital market in both emerging and developed
markets. Derivatives assist business growth by disseminating price signals with respect to exchange rates,
indices or other assets.
A Mitra (2009):
Points out the lack of diversity in instruments in India with more issuance of standard fixed coupon bonds of
average maturity of 5 to 7 years. Internationally as they observe, variety of bonds are available like step up
bonds.
Shen Hung Chen and Chun Hung Tsai (2010):
Study the heterogeneity in the investment behaviour of the individual investors. Study reveals that while
female investors are more detail oriented, the elderly investors have low risk tolerance. They also conclude
that the level of education and income level impact the risk appetite of the investors. They also conclude that
singles have more risk tolerance while married has less.

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David Nicolaus (2010):

Finds that retail derivatives allow the retail investors to pursue sophisticated trading, investment strategies
and hedge financial instruments. The retail investor’s motivation for improving the after-tax return of the
household portfolio drive the urge for the derivatives choice of the products and that provides little equity
exposure for the investors.
Amarendra Acharya (2011):
Studies the various stages of development of the corporate bond market in India. The author views that only
measures to make public offerings attractive will help to ensure participation of the retail investors. This will
also result in bringing liquidity in the market, he suggests. The study also reveals a unidirectional casualty
from call rate, Exchange rate and Inflation rate to the bond yield. The study does not reveal what type of
retail friendly bonds would increase retail participation.
Tirath Ram Basra (2011):
In their study on the role of Merchant Banking in Public Issues observes that the presence of merchant
bankers is concentrated in Mumbai. Wide retail distribution network of Merchant Bankers has been
emphasized in the study for success in public issues. To boost the investors’ confidence the authors, suggest
dissemination of fair price, transparency and integrity with regulatory governance.
Shamim Ansari Mohd. (2012):
Opines that low yield and absence of hedging opportunities are responsible for narrow corporate bond market
in India. The author points out that the retail investor intermediation in India is -mainly through the Banking
system and suggests that there is a need for innovative financial instruments with innovative regulations and
service providing mechanisms to channelize the domestic savings towards the most productive sectors.
Dr. Aparna Samudra and Dr. M.B.A. Burgh ate (2012):
Study the investment behaviour of the middle-class households in Nagpur. The research findings reveal that
the saving habits of the sample Households of the middle class are good but not with the long-term saving
objective to build a financial corpus. The paper therefore emphasizes the need for explaining to the middle-
class households that the investment choices at different phases of life should be different with the
comparatively younger group having more choices than the older group.
Ken Miya Jima et al. (2012):
Highlights the recent resilience of local currency Government Bonds against the backdrop of continued
strains in the Global Financial Market. This once again establishes the dominance of Government Bonds in
the Debt Market in India and it calls for urgent reforms to fill the gap in the corporate Bond Market in India
particularly in the wake of reduction in the role of Government Bonds in financing the fiscal deficit in terms
of FRBM Act.
Golaka C Nath (2012):
Finds that Bonds issued by the Banks are considered to be the safest investment avenue by the investors for
which they are ready to pay also. The author also observes that the default risk is high at the shorter end due
to uncertainties in the short term and the default risk falls at the longer end. The study also shows that the
market does not trade much on low rated Bonds with credit rating of A/BB/BBB. The study reveals that the

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market participants are using the past credit spread information up to 2 days lag to price the spread on
corporate bonds.
Himanshu K. Barot (2012):

Makes in-depth studies of investors’ Preferences towards various investment avenues in capital market with
special reference to Derivatives. The author suggests that the Derivative market is safe and efficient. He
views that the exchange segment well controls risk with the participation of the central counterparties who
mitigate the risks of all the participants.
Khanna and Varottil (2012):
Emphasis the need to address the legal impediments like Bankruptcy framework, standardization and
transparency of the corporate bond market and protection against opportunistic behaviour between investors
and borrowers.
Sunder Raghavan (2012):
Corporate Bond Market in India: Lessons from Global Market and Road Ahead, International Journal of
Trade, Economics and Finance, Volume 3, No. 2.
Dr. Shaik Abdul Majeeb Pasha (2013):
In his study emphasizes that Derivatives allow efficient transfer of financial risks and helps to ensure that
value-enhancing opportunities will not be ignored. He also discusses on ten misconceptions that restrict use
of derivatives.
Prof. Ujjwal Bairagi and Prof. Charu Rastogi (2013):
Studies the retail investors in Pune city and finds that in terms of the investment objectives influencing the
retail investors’ preferences and their behaviour, the influencing factors in order of ranking are safety of
investments followed by liquidity and marketability, income generation, capital appreciation, tax benefit and
diversification. The study has limitations as it has not delved into innovative instruments and the investors’
choices of these instruments with higher risk and return, once these are available in the market.
Kanad Chaudhari et al. (2014):
Suggests public issue of debt on account of whole or part of existing bank loans. Other suggestions to attract
retail investors are demat trading, tax incentives, lower lot size, retail investors’ quota, bond indices and
credit enhancement.
Dakshayani G. N. (2014):
Reviews the past literatures on investors’ perception. The authors observe that the investment decisions are
influenced by the retail investors’ risk-taking ability and investment objectives. He emphasizes on the risks
involved in investments and a careful investor makes proper analysis of the risks before making a choice out
of several investment avenues.
Sunder Raghavan et al. (2014):
Suggests more measures from Government to make corporate bonds more attractive to small savings
schemes. The authors view that in spite of the reform measures by the SEBI the retail investor market in
corporate bonds still remain shallow but the gap remains in this study on how to make the retail market
vibrant.

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Rina Das and Dr. B N Shubha (2015):

Emphasizes the need for a vibrant corporate Bond Market that will enable risk pooling and risk sharing
between the investors and the borrowers. Among the factors responsible for slow growth in the corporate
bond market, as the authors point out, are lack of committed market makers, lack of credit enhancement, lack
of benchmark yield curve, lack of liquidity in trading and others. Presence of few retail investors is also
responsible for slow growth in the corporate bond market, the authors opine. The authors do not prescribe any
concrete steps for maximizing retail investors in the corporate bond market.
Nezhad Police et al. (2015):
Stresses the need for development of corporate bond market not only as a substitute to bank loan but also as
its complement. They explain that with contraction in the credit flow from banks due to phased adoption of
BASEL III, the emerging market economy is likely to slow down completely. They recommend appropriate
economic policies to ensure that the cost of issuance is not a barrier in Bosnia and Herzegovina (BIH) for
corporate to choose this instrument and suggest equal treatment to the investors who may find this as an
alternative to savings.
Jagannadham Thunuguntla (2015):
Suggests secured short term fixed rate bond of a creditworthy corporate through private placement route as
ideal instruments. But as R H Patil is against the disproportionate growth of private placement market which
he rightly called time bomb. Moreover, the secondary market can be deep and liquid only with diversity of
investors through public issue.
Smt. Arundhati Bhattacharya (2015):
Has stressed upon the need for investors’ education on corporate Bonds and also allowing tax-free status to
the Private sector corporate also. The author however overlooks the changing perception of the retail segment
with diversity in risk-return appetites across all maturities over the retail investors as an alternative to and
above the traditional tax-free bonds with implied Government guarantee.
Shyam Srinivasan and Ravi Ranjit (2015):
Suggest that a liquid derivative market adds to the depth of the underlying market and aids price discovery.
The authors also suggest investor awareness campaign by FIMMDA and other bodies. The article does not
deal with the existing weaknesses in market making and the solutions for that.
Prof. Sonali Patil and Dr. Nandewar (2015):
Aim to understand the behaviour of the individual investors in the financial market. The authors observe that
there are various factors that impact the individual investors. These are social, economic, psychological and
demographic. It is opined that it is risk free return that influences investment of the individual investors. This
phenomenon as the authors observe is true irrespective of income, education and salary. This confirms as the
study concludes, the play safe rule followed by the Indian investors. But with the different classes of
investors with different risk return choices, the study fails to examine the prospects of riskier instruments.
G Velmurugan et al. (2015):
Makes an empirical analysis of investors towards various investment avenues in the Vellore city of Tamil
Nadu. The authors have found the literatures conflicting and observe that the same do not clearly bring out
the investor’s perception for investment. The authors have finally drawn conclusions based on certain
parametric tests conducted. It therefore necessitates further study on the diversity in the perception and
behaviour of the individual retail investors.

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K Parimalakanthi and Dr. M Ashok Kumar (2015):

Study the individual investors’ investment preference and behaviour in the Coimbatore city. They find that
most of the investors in the Coimbatore city prefer Bank Deposits followed by investments in Gold and
Silver.
Sarang S Bhola and Vrushali B Shah (2015):
Aims to decipher the investment pattern of the investors in the Satara district of Maharashtra. They observe
that the individual investors follow herd behaviour. They suggest the investors to be guided by risk
associated, fulfilment of obligations, tax aspects, time horizon and features of the products.
Vanita Tripathi and Shilpi Maggo (2015):
Make an empirical analysis of the Foreign Institutional investment (FII) in the Equity and Debt market in
India. They found a positive and high correlation between the FII sales in the Debt market and the FII flows
in the Equity market. FII purchases in debt market have also similar strong and positive correlation with the
FII flows in the equity market. The authors therefore conclude that FII investments in debt market and equity
market are complementary and not substitutes to each other.

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CHAPTER 4 DATA PRESENTATION AND

DATA ANALYSIS

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4.1 INTRODUCTION
Developments in global financial markets

are very fast, becoming more integrated
and
simply impossible be stopped. All the
changes occurred are quickly responded by
the financial
market indicators. The development of
financial markets is becoming more rapid
and more
integrated in causing positive and negative
impacts for the development of domestic
financial
markets. The easily transmitted crisis effect
is one of its negative impacts. Various
issues in
many parts of the world, even those that are
not directly related to the condition of a
country

lOMoARcPSD|33233814
83
or a corporation, are responded quickly by

the movement of financial market indicators,
especially
the debt market. Thus, how important is it
for Bank Indonesia to keep observing at
the
development of financial market indicators,
especially the debt market?
and
the financial
and more
financial

lOMoARcPSD|33233814
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issues in
country
especially
the
and
the financial

lOMoARcPSD|33233814
85

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
86

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
87

the
The debt market indicators reflect market
appreciation against the risk of foreign
loans,
particularly in the form of global bond
issuance in both primary and secondary
market. This
directly affects the movement of supply and
demand of foreign exchange arising from
foreign
loans and portfolio investment.
By embracing the free floating exchange
rate regime (and inflation as the target end),
it
is possible to achieve the independence in
monetary policy and the integration of
financial
lOMoARcPSD|33233814
88
markets, and thus Bank Indonesia is

believed to be uncapable simultaneously
achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
89

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
90

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
91

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
92

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
93

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
94

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
95

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
96

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
97

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
98

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
99

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
100

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
101

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
102

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
103

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
104

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
105

foreign
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financial
achieving the
and
the financial

lOMoARcPSD|33233814
106

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
107

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
108

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
109

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
110

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
111

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
112

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
113

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
114

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
115

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
116

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
117

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
118

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
119

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
120

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
121

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
122

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
123

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
124

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
125

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
126

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
127

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
128

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
129

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
130

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
131

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
132

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
133

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
134

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
135

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
136

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
137

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
138

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
139

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
140

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
141

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
142

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
143

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
144

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
145

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
146

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
147

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
148

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
149

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
150

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
151

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
152

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
153

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
154

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
155

especially
the
loans,
market. This
foreign
it
lOMoARcPSD|33233814
156

financial
achieving the
and
the financial
and more
financial
issues in
lOMoARcPSD|33233814
157

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
158

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
159

issues in
country
especially
the
and
the financial

lOMoARcPSD|33233814
160

and more
financial
issues in
country
especially
the
Developments in global financial markets are very fast, becoming more integrated and simply impossible be
stopped. All the changes occurred are quickly responded by the financial market indicators. The development
of financial markets is becoming more rapid and more integrated in causing positive and negative impacts for

lOMoARcPSD|33233814
161
the development of domestic financial markets. The easily transmitted crisis effect is one of its negative
impacts. Various issues in many parts of the world, even those that are not directly related to the condition of
a country or a corporation, are responded quickly by the movement of financial market indicators, especially
the debt market. Thus, how important is it for Bank Indonesia to keep observing at the development of
financial market indicators, especially the debt market?
The debt market indicators reflect market appreciation against the risk of foreign loans, particularly in the
form of global bond issuance in both primary and secondary market. This directly affects the movement of
supply and demand of foreign exchange arising from foreign loans and portfolio investment.
By embracing the free-floating exchange rate regime (and inflation as the target end), it is possible to achieve
the independence in monetary policy and the integration of financial markets, and thus Bank Indonesia is
believed to be uncapable simultaneously achieving the exchange rate stability, known as the Impossible
Trinity Theory. The exchange rate will fluctuate, determined by the supply demand forces of the forex
market. However, foreign exchange supply and demand should be managed so that the exchange rate moves
in accordance with economic fundamentals and not fluctuate too much. Excessive exchange rate fluctuations
will disrupt the macroeconomic stability and the sustainable economic growth in the long term. Meanwhile,
the foreign exchange supply and demand structure basically consists of 4 streams, namely: (1) Export-Import,
(2) Foreign Loan, (3) Portfolio Investment, and (4) Foreign Direct Investment (FDI). Therefore, it is
important for Bank Indonesia to examine and investigate the movement (behavior) of various indicators of
debt markets, particularly the factors that fundamentally affect the debt indicators of market movements.
The debt market indicators that are widely used global are the yield bond and also recently are CDS. For
example, on 26 February 2009, the Indonesian government made an initial Global Medium-Term Notes
(GMTN) worth a total of USD 3 billion with a rating of Ba3 (Moody’s) / BB-(S & P) and BB (Fitch), which
consists of 2 tranches. Tranche 1 of USD 1 billion, 5-year tenure, published with a coupon 10.375%, yield
10.5% (8.474% above UST with the same tenor) and at position of discounted price at 99.455% while
Tranche 2 USD worth 2 billion, 10- year tenor, coupon 11 625%, yield 11.75% (8.759% above UST with the
same tenor) and 99.276% price. These notes are the biggest debt securities in Asia and the biggest debt ever
offered by the Indonesian government.
When compared to the issuance of securities of peering countries (which have rating similar to Indonesia),
like Philippine government in January 2009, Turkey in September 2008 and Brazil in early 2009, the coupon
and the yield issuance GMTN Indonesian government is expensive. But a high price cannot be avoided
because at the time of publication GMTN, global yield bond Indo≫18 (10 years) is in the range of 10% to
11% and the CDS of Indonesia is in the range 640 sd. 661 bps. The increase global yield bond Indo≫18 (10
years) and CDS occurs significantly in the early months before the publication of GMTN and peaked at the
time of pricing. The improvement of global bond yield indicator and CDS from time to time, significantly
affects the cost of funds of the global publishing of Indonesia, and thus also expected vice versa.
Furthermore, on 16 April 2009, the Indonesian government has set an offering price SBSN (Surat Berharga
Syariah Negara/State Islamic Securities) or sukuk at USD 650 million. Those sukuk are sold at a nominal
100% with a fixed return rate of 8.8% per year, a tenor of 5 years of the date of publication 23 April 2009.
The issuance of Sukuk of these foreign exchanges a prime issue for the Government in the international
market as well as the largest sukuk straight issuance straight in the denomination of USD outside the GCC
countries and is the first benchmark of USD-denominated sukuk in Asia since 2007. State Sukuk price is
relatively lower when compared with the previous publication, not only due to a more secured structure of the
transaction, but also not the reference condition of the global yield bond and CDS Indonesia, which tend to
decrease.

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Several research on indicators of debt market have been conducted, including the examination of the
relationship between corporate CDS and bond yield (Houweling et al 2001)2 and Hull et al (2003), the
differences in corporate CDS and yield that arise only in the short term but will achieve its long-term
equilibrium price (Zhu 2006). Another study is applying the application the Vector Error Correction Model
(VECM) which found out that sovereign CDS and sovereign bond market have a very significant price
difference. But the study that examines the CDS as an indicator of sovereign risk (Cossin and Jung 2005) is
very rare.
In addition, the individual yield spread; there is also the yield composite which is an indicator that the market
read as a debt market performance indication of a particular country or region. Yield spread composites such
as the EMBI, EMBI Global, EMBI + and CEMBIC describe yield of some emerging market countries
(sovereign bond for the first three and corporate bond for last one). Spread composite issued by JP Morgan
describes the difference between the sovereign bonds yield on emerging market with the bond yield which is
considered risk free (T-bill or T-bond issued by the U.S. government or other developed countries).
This study is different from the previous studies because this study specifically examines the behavior of
some common indicators of the debt market commonly referred by the actors and the analyst of international
market debt at the governmental and private bond markets of Indonesia. However, for certain indicators, in
order to sharpen the analysis, this study also conduct comparisons with peer countries, among others in Asia
(Philippine and Turkey), Latin America (Brazil) and South Africa. Therefore, by taking into account the
possibility of unique conditions of the country then at least the results of this study will be able to describe
the condition of Indonesia, although did not necessarily can be applied to other countries, particularly to
countries with characteristics similar to Indonesia.
In general, this study focuses on debt market indicators which are often used as a reflection of market
appreciation in giving the foreign loans the government and the private sector, particularly in the form of
global bond issuance in both the primary and secondary market, namely: the yield sovereign global, yields
corporate global bond, composite yields and CDS.
In particular, this paper aims to analyze and formulate strategic measures to keep the movement of
Indonesian debt market indicators not too fluctuating and to continue to reflect its fundamental factors. In
setting these steps, the author refers, among others, to the identification and measurement of the dominant
factors that affect debt market indicators. Keeping the debt market indicators not too fluctuate and reflecting
its fundamental factors are very important in order to obtain the cost of funds of foreign loans, that is
reasonable and under a measurable risk capacity. An increase in risk that is not under a measurable capacity
will push a short rapid capital flow which later can disrupt the stability of Indonesia’s financial markets.
The second part of this paper describes the theory and literature studies. The third section reviews the
methodology while the results and analysis are described in the fourth chapter. Conclusions and
recommendations are to be presented at the end.
development of financial market indicators, especially the debt market? and
simply impossible be stopped. All the changes occurred are quickly responded by the financial
market

lOMoARcPSD|33233814
163
and
the financial
market
and
the financial
and more
financial
issues in

lOMoARcPSD|33233814
164

country
especially
the
loans,
market. This
foreign
lOMoARcPSD|33233814
165

it
financial
achieving the
and
the financial
and more
financial
lOMoARcPSD|33233814
166

issues in
country
especially
the
loans,
market. This

lOMoARcPSD|33233814
167

foreign
it
financial
achieving the
and
the financial

lOMoARcPSD|33233814
168

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
169

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
170

the
and
the financial
and more
financial
issues in

lOMoARcPSD|33233814
171

country
especially
the
and
the financial
and more

lOMoARcPSD|33233814
172

financial
issues in
country
especially
the
and

lOMoARcPSD|33233814
173

the financial
and more
financial
issues in
country
especially
the
lOMoARcPSD|33233814
174

and
the financial
and more
financial
issues in
country

lOMoARcPSD|33233814
175

especially
the
and
the financial
and more
financial

lOMoARcPSD|33233814
176

issues in
country
especially
the
and
the financial

lOMoARcPSD|33233814
177

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
178

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
179

the
and
the financial
and more
financial
issues in

lOMoARcPSD|33233814
180

country
especially
the
and
the financial
and more

lOMoARcPSD|33233814
181

financial
issues in
country
especially
the
and

lOMoARcPSD|33233814
182

the financial
and more
financial
issues in
country
especially
the
lOMoARcPSD|33233814
183

and
the financial
and more
financial
issues in
country

lOMoARcPSD|33233814
184

especially
the
and
the financial
and more
financial

lOMoARcPSD|33233814
185

issues in
country
especially
the
and
the financial

lOMoARcPSD|33233814
186

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
187

loans,
market. This
foreign
it
financial
achieving the

lOMoARcPSD|33233814
188

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
189

the
loans,
market. This
foreign
it
financial
lOMoARcPSD|33233814
190

achieving the
and
the financial
and more
financial
issues in
country
lOMoARcPSD|33233814
191

especially
the
and
the financial
and more
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lOMoARcPSD|33233814
192

issues in
country
especially
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and
the financial

lOMoARcPSD|33233814
193

and more
financial
issues in
country
especially
the

lOMoARcPSD|33233814
194

and
the financial
and more
financial
issues in
country
especially
lOMoARcPSD|33233814
195

the
and
the financial
and more
financial
issues in

lOMoARcPSD|33233814
196

country
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4.2 RESULT AND ANALYSIS
1. The Individual Sovereign Global Bond Yield
Using Indonesian data, the estimation on the influence of fundamental and external factors to the Indonesian
governments sovereign bond yield (INDO14) is given below. This empirical model is based on Berbecaru
Claudia & Floriana (2008):
This estimation result indicates that the fundamental factor that affects most significantly the global sovereign
bond yield of Indonesia is the foreign reserves (FR) while the external factor is the VIX index.
The role of foreign reserves is very significant in determining the amount of insurance required by investors
when purchasing securities of a country. An empirical test shows that an increase of foreign reserves by 1%

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would cause a decline of global sovereign bond yields by 0.737%. Meanwhile, the VIX index, as one of the
primary measurements of market expectations of short-term volatility (30 days), and which is usually taken
into consideration by many to be a barometer of investor sentiment and global market volatility, also affect
very significantly the amount of compensation required by investors when Indonesia holds the debt. As noted
earlier, the VIX tends to fall when market sentiment improved. Therefore, the VIX can be considered as a
proxy for investors to avoid risk and to be able to explain the movement of the emerging market bond spreads
(K. Hartelius, K. Kashiwa’s, and LE Kodres 2008). However, based on this research, the influence of foreign
reserves is greater than the influence of VIX index.
For the data that covers Indonesia and its peers, the estimation of empirical model is conducted by using the
common effect panel data estimation techniques, which the result is given as follows:
This model shows that global sovereign bond yield is significantly affected by foreign reserves (FR) the VIX
index, and the dummy issue (D1). Based on empirical test results above, the percentage change in foreign
reserves is adversely affecting the global sovereign bond yield, which means that an increase in the reserves
would reduce the global sovereign bond yield of these countries. It is also in accordance with studies
conducted by Budina & Mantchev (2000), stating that foreign reserves are considered to be the first
important factor when discussing the chances of a crisis. Therefore, the lower a country’s foreign reserves,
the lower the country risk rating, meaning that the greater the chance of a default occurring.
The VIX Index has positive influence on global sovereign bond yield, where each 1% increase of the VIX
index will encourage an increased yield by 0.75%. The significance of the VIX index is in line with the
statement Hartelius K., K. Kashiwase, L.E. Kodres (2008) that the VIX index can be considered as a proxy
for investors to avoid risk. Global sovereign bond yield reflects the default risk of a country and the level of
investors≫ unwillingness to purchase the bonds that country. So, the risk appetite of investors is determined
by the investor’s financial condition, liquidity risk in the debt market, which greatly affects the global
sovereign bond yield movements.
What is interesting from this result is that dummy issue variable significantly affecting yield, meaning that
issues, especially negative news, will significantly improve yield. Therefore, it does not seem appropriate if
the policymakers underestimate the various rumors circulating in the market, especially they are the negative
ones. To respond to this, the stakeholders need to treat a variety of issues that developed in the market and
seek a variety of efforts to minimize the negative issues about Indonesia in the international market. Some
ways that can be achieved, among others, is by providing an explanation, directing and consistently
maintaining the credibility of information delivered.
2. Composite Sovereign Global Bond Yield

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And to see the relationship between the composite global sovereign bond yields with the fundamental factors
of some countries, including Indonesia, by using panel data estimation, then based on model selection test,
model which will be analyzed is the model using a common method effect. The estimation results are as
follows:
The estimation results show that, for the data of Indonesia and its peers, the variables that affect the
composite yield of this region are only real effective exchange rate (REER) and the risk of default (DSR),
while the fundamental variables like GDP and market issues, do not actually cause a significant influence.
REER or real effective exchange rate is the weighted exchange rate of a currency against a currency basket,
which has been adjusted to the inflation in a given year. Generally, the scaling of the exchange rate of each
currency uses the value of trade of these countries. REER is therefore more appropriate to be used as an index
to measure a country’s export competitiveness. Based on the estimation model, an appreciation of REER by
1% will cause a decrease in composite yield index by 0.2%.
Besides REER, DSR variable also significantly affects the composite global sovereign bond yield in a
positive way. This ratio indicates the amount of income needed in a year to pay the total annual debt, so that
the greater the DSR, the greater the risk of default. The estimation results indicate that an increase of default
risk due to a 1% increase of DSR will encourage an increase of composite EMBI yield by 0289%.
3. Corporate global bond yield
In analyzing the case of global corporate bond yield, based on the journal of Eduardo Cavallo & Patricio
Valenzuela (2007) and by using the panel data estimation and test of model selection, estimation results are
obtained by using the common method effect as follows:
From the estimation results, it can be seen that almost all variables except the debt equity ratio (DER)
significantly affect the yield of individual global corporate bond for the corporations in Indonesia.

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Return on Equity (ROE) significantly affects the yield of Indonesian corporate. This ratio indicates the ability
of own capital to generate profit. So, when a company’s ROE increases, the yield of an Indonesian corporate
will decline. Empirically for the corporate bond market in Indonesia, an increase by 1% of ROE will reduce
corporate bond yield by 0.03%.
Empirical model specification above only includes a single macro variable which is inflation. This is because
inflation is a price indicator that will affect production and profits of the corporation. Based on the above
estimation, inflation greatly affects corporate yield in Indonesia. It can be seen from the grand value of
inflation coefficient. With 1% of inflation the yield of corporate Indonesia will increase by 0.702982%.
On the other hand, the empirical estimation results above show the anomaly where the effect of the current
ratio (CR) and net profit margin (NPM) give a positive influence on the yield of corporate bonds, and this is
contradictive to the theory. The current ratio shows the ratio of current assets to the company’s debt, where a
larger CR magnitude shows a better condition of the company’s fundamentals. The consequence is that the
bonds yield issued by these healthy companies, does not have to be large or tend to be lower than the
company with weaker fundamentals. This means that the CR should negatively affect the yield. The same
logic applies to corporate profits (NPM).
Based on the research of Ulupui (2006), the allegations of this anomaly took place post economic crisis when
the investors began to pay attention to cash management, accounts receivable, and inventories of the
company before deciding to invest. Thus, although many current assets exceed current liabilities, or though
the levels of profit are improving, the conditions still remain a concern for investors related to the company’s
ability to manage cash and accounts receivable.
Basically, the current ratio shows the margin of safety or the company’s ability to repay these debts. But a
company with a high current ratio does not necessarily guarantee that it will be able to repay the debts that
have already passed the due date, because there is a possibility that the amount of supplies is one of the
causes of the mounting assets. The proportion or distribution of non-profitable assets, because of this amount
of inventory that is relatively high compared to the estimated level of sales to come, caused low inventory
turnover and showed the existence of over-investment in the inventory. Plus, the outstanding amounts
account receivable that is proven to difficult to recover. Therefore, the lower a company’s ability to generate
revenue for the company will increase the risk of the company to be defaulted. Therefore, the yield is still
increasing.
In addition, although in general a low current ratio contains more risk than a high current ratio, sometimes a
low current ratio shows the leads of the company are capable in using the current assets very effectively. That
is when the balance is adjusted with only the minimum requirement of inventory and the receivables cycle
from the inventory is increased to the maximum level. Total cash required depends on the size of the
company and especially of the amount of money necessary to pay the debt, the costs of routine and
emergency expenses
(Single, 1995: 157).
In the case of NPM, NPM in general is one of the profitability ratios which will provide the final answer
about the effectiveness of corporate management. This ratio gives an idea on how effective management of

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the company. The greater the NPM ratio, the bigger the net profit in a way that it is possible to assess how
effective the better management of the company.
This will reduce even more the default risk. But if the large net profit is mostly used to pay taxes or other
charges whose amount is larger than the debt payments, the impact on default risk will tend to grow up.
4. CDS Yield
Based on the model used in the research Alexander & Kaeck (2007) to analyze the relationship between CDS
yield in Indonesia with its determining factor, the estimation result using OLS method is as follows:
Based on estimation above, there are three variables that significantly affect the CDS yield Indonesia. First,
the implied volatility that reflects market views toward Indonesia, as reflected by the changes of VStoxx
index. A 1% increase in the index would increase the probability of default occurring (yield) of 0.138352%.
Besides yield CDS also positively influenced by CDS yield, which previously was valued around
0.891946%.
In addition to external factors, there is a macroeconomic fundamental factor which affects negatively yield of
Indonesian CDS: real GDP growth. This shows that the level of country risk, especially Indonesia, is strongly
influenced by the economic growth of Indonesia, which is reflected by the real GDP of Indonesia. This is
consistent with the theory that stated that the better the economic conditions of a country, the smaller will be
the country’s default risk perceived by the investors. But among the three variables that significantly affect
the movement of yield CDS Indonesia, the one with the greatest influence is the yield previous CDS.
Therefore, a constant effort to keep the movement of CDS on the level considered safe becomes very
important.
To analyze the relationship between yield CDS of Indonesia and its peers with their determining factor, the
same model as before is used, with a slightly different method of estimation of panel data. So based on the
selection test model, the one to be analyzed are fixed effect model using the method:

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With the fixed effect (cross) each country as the follows:

_PHIL--C -0.644844
_INDO--C 0.138755
_BRA--C -1.266955
Similar _COL--C 2.481957 with the CDS yield in Indonesia, any VStoxx index
change _PERU--C -0.680520 that reflects the risk level of a country risk is also
_TURK--C 0.225518 applicable to the peers. Increased volatility will
increase the probability of default. And when the probability
_PAN--C -0.553362
of default increases, the cost of default insurance as
_SA--C 0.299449
described by the CDS yield will increase as well.
Therefore, the CDS yield will increase when volatility increases. So it can be concluded that the CDS yield is
determined by the volatility index, proxied by VStoxx.
CHAPTER 5
CONCLUSION

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1. Bonds are just like IOUs. Buying a bond means you are lending out your money.
2. Bonds are also called fixed-income securities because the cash flow from them is fixed.
3. Stocks are equity; bonds are debt.

4. The key reason to purchase bonds is to diversify your portfolio.
5. The issuers of bonds are governments and corporations.
6. A bond is characterized by its face value, coupon rate, maturity and issuer.
7. Yield is the rate of return you get on a bond.
8. When price goes up, yield goes down, and vice versa.
9. When interest rates rise, the price of bonds in the market falls, and vice versa.
10. Bills, notes and bonds are all fixed-income securities classified by maturity.
11. Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
12. Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower
to default on the debt payments.
13. High-risk/high-yield bonds are known as junk bonds.

14. You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can buy
government bonds through Treasury Direct.
15. Often, brokers will not charge a commission to buy bonds but will mark up the price instead.
16. From the study it is concluded that most of the investors in Mumbai were highly educated and therefore,
they considered ‘own study and observation’ as an important factor for their investment decisions.
17. Though the investors are highly educated it was revealed that investors faced difficulties in differentiating
various investment avenues also they lack in knowledge and skills of investing
18. It is revealed that investors consider relatives and friends as reliable source for information about
investment and investment avenues followed by newspaper / magazines.
19. It is concluded that large portion of investor’s portfolio belongs to safe investment avenues.
20. It is concluded that investors prefer safe and secured investment avenues to save tax and also, they give
preference to investment avenues which will help them to get dual benefit like Real estate/ buying a house
against loan.
21. It can be concluded that investors are not strongly agreeing regarding knowledge in the field of
investments.
22. It is concluded that still the investors in Mumbai are not properly aware regarding new investment
instruments (Derivatives and commodities) and their benefits
23. Considering current scenario of real estate market it is concluded that every investor must have real estate
as a part of their portfolio.

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24. It has been observed that the investors are investing in residential property along with commercial
property because it acts as extra income source.
25. It is concluded that investors still prefer banks over other kinds of fixed deposits.
26. Considering past, present and future prospects of Gold and silver it is concluded that every investor must
have precious metals as a part of their portfolio.
27. It can be concluded from the study that though most of the investors are aware of portfolio management
concept, they have not taken PMS for creating their portfolio also they had not shown positive response for
the PMS service in future as PMS is costly and it is restricted to equities only. It was also found that the
investors those who have opted for PMS don’t want to continue with the PMS. It can be concluded that
investors are not interested in PMS Service.
28. It can be concluded that most of the investors are not regular traders and they follow simply the buy and
hold strategy.
29. It is concluded that most of the investors in Mumbai are moderate risk taker.
30. The investors in Mumbai had been facing various risks in their investments like Depression phase in
market, fall in Sensex/ Nifty, Inflation, Fluctuations in Interest rates, Global Turnaround and Recession. It can
be concluded that inflation period has impact on the savings as it increases the expenses and also affects the
overall economy/market. Thus, inflation acts as risk involved in investment portfolio. The study of
management of portfolio is based on hypothesis that there is a significant difference in investment portfolio
of investors in Mumbai. The portfolio is tested according to the sex, age, education, occupation and income
level of the investors. The study revealed that Investors in Mumbai invest in their portfolio irrespective of
their Gender, Age and of income.
This book has explained how and why the relation between creditors and sovereign debtors has evolved since
the 1820s. Although it has become increasingly difficult for foreign governments to renege on their financial
commitments, “sovereign bankruptcies” are still frequent: no fewer than 94 countries defaulted on their FC
debt in the twentieth century. As a result, investors and bankers have been obliged to develop various tools to
anticipate and protect against such threats. Experience suggests that investors’ monitoring should rely on
credit ratings in times of low risk aversion but shift to bond yields if an economic slowdown has been
ascertained and risk aversion is climbing (Gaillard 2014b, pp. 129–131).
When the borrowing costs of a debt-burdened government become excessively high (e.g., Greece starting in
January 2010), it is sometimes too late to implement austerity programs. Since the turn of the twenty-first
century, such policies have failed to restore sovereign creditworthiness and have actually amplified debt
crises in two major cases: Argentina in 2000–2002 and Greece in 2010–2012. These failures support two
views. On the one hand, there is an idiosyncratic debt threshold beyond which a particular country is
especially vulnerable in cases of adverse economic, financial, or political events (Reinhart et al. 2003);
exceeding that threshold will likely lead to a restructuring of that country’s debt. On the other hand, fiscal
consolidation measures may simply be too late and inefficient to compensate for previous unsound
macroeconomic policies and past fiscal profligacy (IMF 2013b).
For that reason, some governments have tried to overcome the “default or consolidate” dilemma by exerting
financial repression (Reinhart 2012). This approach – which may include (among other measures) negative
interest rates, purchases of sovereign debt by the central bank, capital controls, a tax policy that constrains

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savers to buy and hold sovereign bonds, and/or stricter supervision and control of the banking sector – has
been used by the governments of both industrialized and developing countries. The financial repression
phenomenon trims creditors’ returns and reflects the on-going complex relations among a state, its central
bank, and its creditors. More fundamentally, it shows that any government is capable of taking heterodox
monetary or financial measures to remain solvent. In other words, a struggling sovereign borrower is a unique
debtor because it may adopt the path of least resistance and continue to honour its financial obligations.
This study analyzes the debt market in Indonesia with a focus on 2 indicators, namely bond yield (individual
or composite) and CDS (Credit Default Swap) yield. This study rises some conclusions, first, the empirically,
this research shows that in the debt market in Indonesia, inflation level, foreign reserves (which reflects the
conditions of liquidity) and the VIX index (which reflects the level of market sentiment), affect the
movement of global government bond yield in Indonesia. This conclusion is consistent with individual debt
market conditions of any peer countries of Indonesia. For the composite yield on government bonds
(composite global sovereign bond), the influential factor is the real effective exchange rate or REER and the
debt service ratio (DSR). Second, the movement of yield for corporate bonds is affected by the company’s
fundamentals, such as current ratio, net profit margin, and return on equity and also by inflation. Meanwhile
indicators of CDS yield in Indonesia yield are greatly affected by VSTOXX index, yield on the previous CDS
and GDP growth.
The study provides several implications. For monetary authorities, there are at least 2 things. First is to keep
in mind that inflation significantly affects the movement of global government bond yield in Indonesia.
Therefore, Bank Indonesia, as the authority in charge in keeping the inflation rate, needs to have a strong
commitment to continuously improve the transparency and the speed of information on monetary policy
taken in accordance with international best practices in the inflation targeting framework. One also needs to
optimize the use of media and the market access expansion in delivering the information and data related to
monetary policy. Second, Bank Indonesia needs to continue to make efforts in securing the foreign exchange
liquidity supply lines in order not to cause any pressure on the exchange rate and so that the exchange rate
really reflects its fundamental factors, either in the form of supply demand of the foreign exchange for
import-export activities, FDI, foreign loans or portfolio investment.
Recent turmoil in debt market has made many investors risk averse and forced them to look for other safer
avenues to invest their funds. However, recognising the importance of the debt market and dependence of
major players in the economy on debt market as a primary source offend, the regulators have been actively
engaging in correcting and regulating the debt market. Even after2018beingayearofturmoil for the debt
market largely due to uncertainty in policy of RBI and the credit risk in the market due to defaults by IL&FS,
data shows that in many cases debt returns have outperformed equity markets in debt mutual fund categories.
Hence, the overall awareness about the opportunities and risks associated with the debt market and better
regulations will result in an even higher growth in the debt market of India which lags far behind in terms of
market share as compared to other developed economies.
Development of long-term debt markets is critical for the mobilisation of the huge magnitude of funding
required to finance potential businesses as well as infrastructure expansion. Despite a plethora of measures
adopted by the authorities over the last few years, India has been distinctly lagging behind other developed as
well as emerging economies in developing its corporate debt market. The domestic corporate debt market
suffers from deficiencies in products, participants and institutional framework.

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For India to have a well-developed, vibrant, and internationally comparable corporate debt market that is able
to meet the growing financing requirements of the country’s dynamic private sector, there needs to be
effective co-ordination and co-operation between the market participants that include investors and
corporates issuing bonds as well as the regulators. Issues such as crowding of debt markets by government
securities cannot be addressed by market participants and regulators alone. Better management of public debt
and cash could result in a reduction in the debt requirements of the government, which in turn would provide
more market space and create greater demand for corporate debt securities.
Clearly, the market development for corporate bonds in India is likely to be a gradual process as experienced
in other countries. It is important to understand whether the regulators have sufficient willingness to shift
away from a loan-driven bank-dependent economy and also whether the corporations themselves have strong
incentives to help develop a deep bond market. Only a conjunction of the two can pave the way for the
systematic development of a well-functioning corporate debt market.

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CHAPTER 6
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CHAPTER 7 APPENDIX
(QUESTIONNAIRE)

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Study of Debt Market In India
1. Name:
2. Gender:
 Male
 Female
3. Age:
 18 to 30
 31 to 45
 46 to 60
 60 & above
4. Occupation:
 Student
 Home Maker
 Service o Businessman
 Professional o Retired
5. Annual Income:
 Nil o Up to 2 lakhs
 2 lakhs to 5 lakhs
 5 lakhs to 10 lakhs
 10 lakhs & above
Global Debt Market
1. The total size of the global debt securities market: $98.4 trillion

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Data compiled by the Bank for International Settlement

Schedule:8
SR. NO. PARTICULAR PERCENTAGE

1 Financial Organisation 42%
2 Corporations 12%
3 International Organisation (E.G. IMF) 1%
4 Governments 45%
2.Over two thirds of corporate bonds outstanding are in US dollars
Schedule:
SR NO. PARTICULAR PERCENTAGE

1 USD 69%
2 CAD 3%
3 EUR 20%
4 GBP 5%
5 JPY 3%
3. 78% of corporate bonds have an investment grade credit rating

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Schedule:
SR.NO. PARTICULAR PERCENTAGE

1 A 33%
2 AA 7%
3 AAA 1%
4 CCC 3%
5 B 9%
6 BB 10%
7 BBB 37%
4. Market Capitalisation

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Schedule:

1 Government securities 66.13%
2 PSU Bonds 4.44%
3 State Loans 14.21%
4 T-bill 4.73%
5 Other 10.49%

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5. Participant wise Distribution of WDM Turnover 2008-09
Schedule:
SR. NO PARTICULAR PERCENTAGE

1 Trading members 44.65%
2 FI,MFs Corporates 3.40%
3 Indian Bank 18.11%
4 Foreign Bank 27.26%
5 Primary Dealers 6.58%

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6. Security-wise Distribution of WDM Turnover 2008-09
Schedule:

1 Government Securities 69.74%
2 T-Bill 16.91%
3 PSY/Inst.Bonds 8.93%
4 Other 4.41%

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7. Foreigner hold substantial share of US corporate holding of US corporate bonds

end 2019 %
Schedule:

1 Householder Sector 6.6%
2 Foreign Holders 25.6%
3 Mutual Funds 16.6%
4 Insurance Sector 26.3%
5 Pension Funds 10.3%
6 Other 14.7%

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8. Treasury notes represented the majority of outstanding marketable debt at the

end of 2020
Schedule:

1 FRN 2%
2 Notes 53%
3 Bills 24%
4 Bonds 14%
5 TIPS 8%
10. Comparison with other countries
Drawing on the cross-sectional experience of G7 countries since the 1970s, it is estimated that the overall
capitalization of the Indian debt market (including public-sector debt) could grow nearly four-fold over the
next decade. This would bring it from roughly USD 400 billion, or around 45% of GDP, in 2006, to USD 1.5
trillion, or about 55% of GDP, by 2016. This growth, if not crowded out by public sector debt, could result in
increased access to debt markets for Indian corporates.

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11. 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 (Central 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.)

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12. Current status
According to the Securities and Exchange Board of India (SEBI) database, outstanding corporate bonds
amounted to around Rs. 9 trillion ($147 bn approx.) in 2011 making it nearly 10.5% of Gross Domestic
Product (GDP) (SEBI 2012), whereas the proportion of bank loans to GDP in India is approximately 37%. In
contrast, as seen in Figure 1 below, outstanding corporate bonds are close to 90% of GDP in US where the
corporate debt market is most developed and bond market financing has long replaced bank financing as a
funding source for the corporates; around 34% in Japan and close to 60% in South Korea (Bank for
International Settlements (BIS 2012). In terms of size, as of 2011, the Indian corporate debt market was close
to 7% of that of China and 15% of that of South Korea (BIS 2012).

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Annual gross issuance

In billions of US dollars
Graph A1
Sums across Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Hong Kong SAR, Hungary,
India, Indonesia, Israel, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, Saudi Arabia,
Singapore, South Africa, Thailand, Turkey, the United Arab Emirates and Venezuela.
Redemption schedule
By currency denomination, by residence (first bar) and nationality basis (second bar), all sectors, in billions
of US dollars
Graph A2

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Types of interest rate in non-financial corporate sector issuance

As a percentage of total issuance
Graph A3
DDS (first bar) and IDS (second bar).
Properties of debt securities

Graph A4
Weighted average for IDS and DDS, by residence; aggregated for the following EMEs: Argentina, Brazil,
Chile, China, Colombia, the Czech Republic, Hong Kong SAR, Hungary, India, Indonesia, Israel, Korea,
Malaysia, Mexico, Peru, the Philippines, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand
and Turkey. Weighted average for IDS and DDS, by residence; aggregated for the following EMEs:
Argentina, Brazil, Chile, China, Colombia, the Czech Republic, Hong Kong SAR, Hungary, India, Indonesia,
Israel, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, Saudi Arabia, Singapore, South
Africa, Thailand and Turkey.

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Appendix index
Comparison of total debt securities from BIS statistics with those from questionnaires
Percentage point deviation between the questionnaire as base to BIS, total debt securities data
Table A1
1 On a residence basis.
2 Comparison using BIS domestic debt securities.
3 BIS total debt securities calculated as the sum of international and domestic debt securities.
4 Data sent in questionnaire are obtained from the Budget Office and may not tally exactly with the external
debt data published by the Central Bank of Chile, given different methodologies.
5 BIS debt securities calculated using publicly available data.
6 Data for financial corporations other than banks and for non-financial corporations comprise only securities
issued domestically. Bonds issued by Bank Gospodarstwa Krajowego for the National Road Fund are
presented as general government debt.
7 Data sent in questionnaire are for securities tradable only in Israel

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Comparison of general government debt securities from BIS statistics with those from questionnaires
Table A2
3 BIS total debt securities calculated as the sum of international and domestic debt securities for general
government.
5 BIS debt securities calculated using public available data.
6 Data sent in questionnaire are for securities tradable only in Israel.

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Comparison of financial corporations’ debt securities from BIS statistics with those from questionnaires
Table A3
2 Data for financial corporations other than banks and for non-financial corporations comprise only
securities issued domestically. Bonds issued by Bank Gospodarstwa Krajowego for the National Road Fund
are presented as general government debt.

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Comparison of non–financial corporations’ debt securities from BIS statistics with those from questionnaires
Table A 4
3 BIS total debt securities calculated as the sum of international and domestic debt securities.
5 BIS debt securities calculated using publicly available data.
6 Data for financial corporations other than banks and for non-financial corporations comprise only
securities issued domestically. Bonds issued by Bank Gospodarstwa Krajowego for the National Road Fund
are presented as general government debt.

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Average maturity at issuance by residence of borrower

In years; all sectors
Table A5
1 Based on maturity at bond issuance.

2 Weighted average of international and domestic debt securities.

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Share of foreign currency denomination by residence of borrower

In per cent; all sectors
Table A6
1 Data for financial corporations other than banks and for non-financial corporations comprise only securities
issued domestically. Bonds issued by Bank Gospodarstwa Krajowego for the National Road Fund are
presented as general government.
2 In Israel data sent in questionnaire are only for tradable securities.

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Share of fixed interest rate products by residence of borrower

In per cent; all sectors
Table A7
Debt information is for securities tradable only in Israel

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Change in the role of debt securities and corporate deposits in the economy
Changes between 2004 and 2013, in percentage points
Table A8
For Thailand, change between 2005 and 2013. For Czech Republic, change between 2006 and 2013.

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lOMoARcPSD|33233814

Black Book of Debt market Project

M.Com Banking and Insurance (University of Mumbai)

Studocu is not sponsored or endorsed by any college or university

“STUDY OF DEBT MARKET IN INDIA”

Subject: project report

SHIVANI SANTOSH SINGH

ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND

JOGESHWARI EAST MUMBAI – 400060

College seat no. 22SMAC6 year 2022-23

Exam seat no.____ year 2022-23

Under the guidance of

PROF. MOHAMED NISHAT SARFARAZ AHMED ANSARI

ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND

JOGESHWARI EAST MUMBAI – 400060

Downloaded by Rohit Bhoir ([email protected])

“STUDY OF DEBT MARKET IN INDIA”

Subject: project report

SHIVANI SANTOSH SINGH

ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND

JOGESHWARI EAST MUMBAI – 400060

College seat no. 22SMAC6 year 2022-23

Exam seat no.____ year 2022-23

Under the guidance of

PROF. MOHAMED NISHAT SARFARAZ AHMED ANSARI

ISMAIL YUSUF COLLEGE OF ARTS, SCIENCE AND

JOGESHWARI EAST MUMBAI – 400060

Downloaded by Rohit Bhoir ([email protected])

Name and signature of guide Date of submission

Name & Signature of External

Name and signature of Professor in charge / H.O.D / principal of the institution

Stamp of the institute with date:

Downloaded by Rohit Bhoir ([email protected])

College Seat no22SMAC6 Year 2022 – 2023

NAME AND SIGNATURE:

SHIVANI SANTOSH SINGH

Downloaded by Rohit Bhoir ([email protected])

I take this opportunity to thank the UNIVERSITY OF MUMBAI for

Providing fir giving me the chance to do this project

I am also thankful to all those people who helped me and guide me to

Make such a project

Downloaded by Rohit Bhoir ([email protected])

It’s my pleasure to introduce myself, I am SHIVANI SANTOSH SINGH

I study M.COM at ISMAIL YUSUF COLLEGE, JOGESHWARI EAST

I have worked on the topic “STUDY OF DEBT MARKET IN INDIA”

I would like to thank my guide PROF. MOHAMMED NISHAT

I submitted my project (Black Book) and gave viva to my professor. I would

I would like to take this opportunity to express my gratitude towards all

NAME AND SIGNATURE OF STUDENT

SHIVANI SANTOSH SINGH

Downloaded by Rohit Bhoir ([email protected])

Downloaded by Rohit Bhoir ([email protected])

Downloaded by Rohit Bhoir ([email protected])

Downloaded by Rohit Bhoir ([email protected])

Downloaded by Rohit Bhoir ([email protected])

Risks associated with debt market

Downloaded by Rohit Bhoir ([email protected])

PRIMARY MARKET OF EVOLUTION

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SECONDARY MARKET OF EVOLUTION