Revival of Debt Markets in India: Issues and prospects
INTRODUCTION
The Debt Market is the market where fixed income securities of various types and features are issued and traded. These fixed income securities are issued by Central and State Governments, Municipal Corporations, Govt. bodies and commercial entities like Financial Institutions, Banks, Public Sector Units, Public Ltd. companies and also structured finance instruments.
Role and Importance
The key role of the debt markets in the Indian Economy stems from the following reasons:
• Efficient mobilization and allocation of resources in the economy
• Financing the development activities of the Government
• Transmitting signals for implementation of the monetary policy
• Facilitating liquidity management in tune with overall short term and long term objectives.
Since the Government Securities are issued to meet the short term and long term financial needs of the government, they are not only used as instruments for raising debt, but have emerged as key instruments for internal debt management, monetary management and short term liquidity management.
The returns earned on the government securities are normally taken as the benchmark rates of returns and are referred to as the risk free return in financial theory. The Risk Free rates obtained from the G-sec rates are often used to price the other non-govt. securities in the financial markets.
Importance to Investors
The Zero Default Risk of the G-Secs. offer one of the best reasons for investments in G-secs so that it enjoys the greatest amount of security possible.
The other advantages of investing in G- Secs are:
• Greater safety and lower volatility as compared to other financial instruments.
• Variations possible in the structure of instruments like Index linked Bonds, STRIPS
• Higher leverage available in case of borrowings against G-Secs.
• No TDS on interest payments
• Tax exemption for interest earned on G-Secs. up to Rs.3000/- over and above the limit of Rs.12000/- under Section 80L (as amended in the latest Budget).
• Greater diversification opportunities
• Adequate trading opportunities with continuing volatility expected in interest rates the world over.
Importance to Financial System of the Country
• Reduction in the borrowing cost of the Government and enable mobilization of resources at a reasonable cost.
• Provide greater funding avenues to public-sector and private sector projects and reduce the pressure on institutional financing.
• Enhanced mobilization of resources by unlocking illiquid retail investments like gold.
• Development of heterogeneity of market participants
• Assist in development of a reliable yield curve and the term structure of interest rates.
OBJECTIVE
1) To identify and analyse the problems plaguing the Indian Debt Market and suggest remedial measures for its revival.
2) To undertake a comparative study of the debt markets in India vis-a-vis the one in the developed countries.
3) To suggest methods by which the returns in the Indian debt markets could be made more attractive to the retail sector.
METHODOLOGY
Sources of Secondary data:
(1) Reports and working papers available on the internet.
(2) Literature survey.
Sources of Primary data:
(1) Interaction with debt traders.
BENEFITS
The research aims to benefit the policy makers, retail investors and corporates.
Innovative Castle 