Understanding Indian Debt Capital Market | srei

Understanding Indian Debt Capital Market

The Indian debt market is a market meant for trading (i.e. buying or selling) fixed income instruments. Fixed income instruments could be securities issued by Central and State Governments, Municipal Corporations, Govt. Bodies or by private entities like financial institutions, banks, corporates, etc. Simply put, a bond/debt can be defined as a loan in which an investor is the lender. The issuer of the bond pays the investor interest (at a predetermined rate and schedule) in return for the amount invested. The Indian debt market offers a variety of debt instruments, offered by the Government and non-Government entities. The factors that are propelling the growth of the market are:

  • introduction of new instruments
  • increased liquidity
  • deregulation of interest rates
  • improved settlement systems

The debt market in India comprises broadly two segments, viz.,

  • Government Securities Market and
  • Corporate Debt Market.

The latter is further classified as Market for:

  • PSU Bonds and
  • Private Sector Bonds.

The corporate bond market, broadly comprises of corporate sector raising debt through public issuance in capital market and also through private placement basis.


  • State governments and Central government. The largest segment of the Indian Debt market consists of the Government of India securities where the daily trading volume is in excess of Rs.2000 crore, with instrument tenors ranging from short dated Treasury Bills to long dated securities extending upto 30 years.(source: www.dbie.rbi.org.in)
  • Non-government entities like Banks, Financial Institutions, Insurance Companies, Mutual Funds, Primary Dealers, Corporate entities.


There are a variety of instruments offered in the debt market like:

  • MIBOR linked bonds. MIBOR (Mumbai Inter Bank Offered Rate) bonds are closely modeled on the LIBOR (London Inter Bank Offered Rate) bonds. Currently, Reuters and the National Stock Exchange (NSE), are the two calculating agents for the benchmark. The NSE MIBOR benchmark is the more popular of the two and is based on rates polled by NSE from a representative panel of 31 banks/institutions/primary dealers.
  • Commercial Papers(CPs). These are short term unsecured promissory notes, generally issued by corporate entities.
  • Certificate of Deposits (CDs). These are issued by banks.
  • Treasury Bills. These are issued by Reserve Bank of India (RBI).
  • Medium- to long-term bonds. These are issued by corporate entities/financial institutions. They can feature fixed or floating rates.
  • Call money market. This represents overnight and term money between banks and institutions.
  • Repo transactions. These represent temporary sale with an agreement to buy back the securities at a future date at a specified price.
  • Collateralized Borrowing And Lending Obligation (CBLO). CBLOs were developed by the Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI). It is a money market instrument that represents an obligation between a borrower and a lender as to the terms and conditions of the loan. The details of the CBLO include an obligation for the borrower to repay the debt at a specified future date and an expectation of the lender to receive the money on that future date, and they have a charge on the security that is held by the CCIL. CBLOs are used by those who are heavily restricted or have been phased out of the interbank call money market.

The other instruments that are prevalent in the debt market are Debentures, Secured premium notes, Deep Discount Bonds, PSU Bonds / Tax-Free Bonds, Floating Rate Bonds, State Government Securities, STRIPS and Interest Rate Derivative products.


The debt market features the usual risks associated with financial securities like:

  • Credit risk. While corporate papers carry credit risk due to changing business conditions, government securities are perceived to have zero credit risk. Credit Risk is the risk that the issuer will not pay the coupon income and/ or the maturity amount on the specified dates. Credit Ratings have been established by rating agencies to reflect their opinion of an issuer’s ability and willingness to do so.
  • Interest rate risk. Interest rate risk is present in all debt securities and depends on a variety of macroeconomic factors. Interest Rate Risk is the risk that interest rates may rise, causing a fall in value of traded debt instruments.
  • Settlement risk. The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement is called settlement risk.All debt securities are settled within the specified duration, excepting special cases like death of the holder, etc, in which case it may be delayed till all the required formalities are completed.
  • liquidity risk. The risk arising from the lack of possibility to either buy or sell a security quickly as per one’s requirement is called liquidity risk. Debt securities have minimum liquidity risk and can be easily bought and sold after due listing.