Development of the Indian Debt Market

In tracing the evolution of the Indian debt market, this paper documents the developments in both the government securities (G-Sec) and corporate debt markets since the initiation of the economic reforms in the early 1990s. The reforms in the G-Sec market have been relatively comprehensive, touching on all aspects related to institutional development, the building of legal, payment and settlement systems, and improvements in market practices. These have been also been accompanied by changes of far-reaching significance in public finances – both at the central as well as state levels. The paper provides a quantitative evaluation of the progress made in the government securities debt market. The progress in the corporate debt market, by contrast, has been limited. In tracing the cross-country experience of the corporate debt market we note that reforms in this sector need far more time and are far more difficult to implement, inter alia, because of the multiplicity of issuers and lack of an adequate number and size of institutional investors. The corporate debt market in India also displays a clear preference for the highest rated issuers, who typically express a preference for borrowing abroad. The suggestions for opening up the Indian debt market need to be in alignment with the calibrated approach to capital account liberalization in India that has helped in maintaining financial stability. Issues like extent of fiscal deficit, the persistence of inflation and interest rate differentials have an important bearing on this issue. Given the success in building the government securities market, however, as the Indian financial sector develops the corporate debt market can also be expected to grow in the future.