DEBT MARKETS IN INDIA
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.
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
- 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
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.
HISTORY OF COMMODITY
MARKETS IN INDIA
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
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
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