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Debt and Commodity – History and present scenario

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Debt and Commodity – History and present scenario


For a long time, bond markets in India were a monopoly of the PSU banks and government only issued bonds to finance its deficit. Banks had no choice but to invest in these bonds to meet their statutory liquidity ratios (SLR). It was only after 1992 (after the Banker’s Receipt fiasco) that the Reserve Bank of India intervened and substantially standardized and modernized the methods, processes and practices. The bond market that we see today is of recent origin. Here are the 8 categories of debt instruments that are currently available.

Debt instruments available in the Indian bond market

  • The biggest chunk of the debt market is the long term government securities (G-Secs) and short term T-Bills market. These are issued directly by the government of India and called gilt-edged as default risk is zero. T-bills come in 2 varieties; 91-day T-Bills and 364 day T-Bills.
  • For short term borrowing, there are debt instruments like Commercial Paper (CP), Certificates of Deposits (CD) and call money. Commercial Paper (CP) is issued by corporates to raise funds for working capital purposes and can range from 3 months to 1 year maturity. In India NBFCs are the biggest issuers of CPs. Certificates of Deposits (CDs) are short term debt instruments issued by banks to raise funds from institutions and corporates. Since CDs are issued by banks, they are considered safer than CPs
  • State governments also issue bonds to raise money for their expenditure which are considered to be riskier compared to G-Secs. At times Municipalities also issue bonds to raise resources.
  • Corporate bonds are typically issued by private sector companies, PSUs, infrastructure institutions and NBFCs. Unlike CPs, which is for short term fund raising, corporate bonds and debentures are for long term fund raising. 
  • Masala bonds were permitted recently. Indian companies are allowed to raise rupee funds via Masala Bonds in international markets. This does not have currency risk.
  • Collateralized debt or securitized debt represents pass-through-certificates which NBFCs and banks use to monetize their loan portfolios. Against their future interest and principal receivable on loans give, NBFCs issue collateralized bonds. Normally, these are issued to institutional investors.
  • Gold Sovereign Bonds is a recent introduction issued by the RBI and linked to the price of gold. It is dematerialized form of owning gold. These bonds also pay interest at 2.5%.
  • Green bonds were the environment friendly bonds that were allowed in India from 2016 onwards and have seen some traction in the last few years.

How is the debt market regulated?

Debt markets are regulated at two levels. Any borrowings pertaining to the government including the issue of Treasury Bills and Dated Government Securities comes under the regulatory purview of RBI. Since government bonds are also traded on the stock exchanges like the NSE and the BSE, these traded instruments are classified as securities and to that extent they fall under SEBI regulations. It is the RBI that manages the borrowing program of the central government and handles T-Bills and G-Secs.

Debt markets – the challenges ahead

Indian bond markets are still very small compared to bond markets in the US, Europe and Japan. The size of the domestic bond markets grew from $1 trillion in 2012 to $1.50 trillion in 2018. That is roughly half the size of the equity markets whereas in most countries the bond markets are a multiple of the equity markets. In India the ratio of (corporate bonds / GDP) has grown from 5% to 15% in the last 5 years but is still very small. Even emerging Asian economies like Malaysia 40% (corporate bonds / GDP) ratio. A healthy bond and debt market is necessary for raising large scale funding for infrastructure projects. Currently, investors can protect their risk in bond markets using interest rate futures.


There is no clear record of the earliest informal trades in commodities. The first organized commodity trades were made in rice futures in Osaka in Japan. The organized trading in commodities began with the Chicago Board of Trade (CBOT) in 1848. In India, commodity trading is almost 145 years old and first started with the formation of the Bombay Cotton Trade Association (BCTA) in 1875. However, the commodity markets had a volatile journey before the government officially banned trading in futures in the 1950s.  That largely ended India’s first tryst with commodity trading.

Modern era of Commodity Markets

While the idea of commodity futures trading was felt after 1991 when India liberalized, the actual thrust came with the establishment of the Multi Commodity Exchange (MCX) in 2003.

There are over 40 commodities that are traded in the commodity futures market with gold and crude oil being among the most actively traded contracts. Currently, Indian commodity futures market permit trading in futures and options, wherein the options devolve into futures. It is possible to trade in the commodity markets on cash basis and also for physical delivery. Commodity markets volume fell sharply after 2013 when the commodity transaction tax (CTT) was introduced on commodity trades on the lines of STT.

Major Commodity Exchanges in India

While there are more than 20 commodity exchanges in India, the major trading volumes are concentrated in 3 exchanges.

Multi Commodity Exchange (MCX)

In terms of volumes, MCX is India’s largest commodity exchange. It offers futures trading in precious metals, base metals, energy products and agricultural commodities. MCX was promoted by Financial Technologies of the Jignesh Shah group. However, post the NSEL fiasco, the group was declared not ‘fit and proper” to run an exchange. Hence the ownership now vests with Kotak Bank, Blackstone GPV Partners and IDFC Premier Equity Fund. MCX is the clear market leader in precious metals, base metals and energy products.

National Commodity & Derivative Exchange (NCDEX):

Although smaller in size and volumes, NCDEX has a leadership position in trading in agricultural commodities. Key shareholders of NCDEX include ICICI Bank, NSE, NABARD and LIC.

National Multi Commodity Exchange of India (NMCE):

NMCE is much smaller in size and volumes and essentially popular for trading in spices and plantation crops from Kerala. There are others like ICEX that are too small currently.

Regulation of Commodity Market Trading

Commodity markets have been under dual regulation from the very beginning. While commodity futures were regulated by Forward Market Commission (FMC) till 2016, the spot markets were regulated by the state governments. Effective, September 2016, the regulation of the commodity futures and options market came under the purview of SEBI post the merger of FMC into SEBI. 

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