The Indian debt market: An analysis; Credit Analysis and Research Limited (CARE)

Abstract

The ongoing reforms in India in the form of deregulation and liberalisation, are an effort to integrate the Indian economy with the global economy. Hence, it is essential to develop an efficient financial market with a robust institutional framework to support it. The Indian capital market has shown enormous growth in recent years in terms of the trading volumes and number of actively involved players. Debt market instruments, as classified based on maturity comprise: short term instruments such as Treasury bills, commercial papers, certificate of deposits, inter-corporate deposits, company fixed deposits, bill discounting, cash credit/bank overdraft etc and long term instruments such as dated and converted government securities, PSU bonds, corporate bonds/debentures etc. Dominant players in the market, today, are Reserve Bank of India, Discount and Finance House of India, financial institutions ( GIC, LIC, UTI, ICICI, IDBI etc. ), commercial banks, public sector undertakings, corporate investors, brokers, Provident Funds and Trusts. The current scenario indicates a tight money market position. This low liquidity in the market can be attributed to various factors. The government policy, in its efforts to control money supply and inflation, had an adverse effect on the funds situation in the market. As the economy has come out of the recessionary phase which prevailed in 1990-93, there is an increased demand for credit form the infrastructural and industrial sector. Inflow of foreign funds have been diminishing. Banks and institutions are facing a liquidity crunch due increased credit offtake. As a result, the development of an active secondary market in debt faces many hurdles. Due to low liquidity in the market, investors are over-cautious and invest only in actively traded securities or in those offering guaranteed and highly attractive returns. This also limits the investor-base which needs to be wide and well-diversified for a liquid market. Hence this forms a vicious circle. Infrastructural problems, due to not so robust trading facilities and systems, also exist. Though the chief objective of establishing institutions i.e. stock exchanges NSE and OTCEI, market makers- DFHI, STCI etc was to organise-an efficient trading system in debt, these institutions have not - been a big success. Trading in NSE is hardly representative of the actual trading volumes in debt.