Debt Market

Click to edit Master subtitle style By

Dr. Gurendra Nath Bhardwaj IILM GSM gurendrabhardwaj@gmail.com gurendra.bhardwaj@iilmgsm.ac.in

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Index
Regulation of debt market Link between Money Market and debt market Characteristics of debt market Participants of debt Market Types of instruments Primary and secondary segments of debt

market

The Government securities Market Introduction,

importance & types

STRIPS Interest rates in primary market
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Regulation of debt market

RBI

The contracts for sale and purchase of government securities, gold related securities, money market securities, securities derived from these securities and ready forward contracts in debt securities etc.
SEBI

Above contacts, if executed on stock exchange will be governed by SEBI in the manner of guidelines issued by RBI in this regard.
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Link between Money Short term instruments (up-to one year) Market and Debt Market
Money Market Debt market
Long term debt (more than one year)

The money market supports the long term debt market by increasing the liquidity of securities.

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Characteristics of Debt Market

Competitive structure Low transaction cost Strong & safe market infrastructure High level of heterogeneity among market

participants.

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Importance of Debt Market

The efficient debt market helps in
reducing the borrowing cost of

Government, financing,

reducing pressure on institutional

by providing greater funding avenues.

enhancing mobilization of resource

by unlocking unproductive investment like gold and

developing a stable yield curve.

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Participants of Debt Market

Central & State Governments Primary Dealers Public Sector undertaking Banks Mutual Funds Foreign Institutional Investors Provident Funds Charitable Institutions and Trusts
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Market Segment

Government Securities

Issuer Types of Instruments

Instruments Zero Coupon Bonds, Coupon bearing bonds, Treasury bills, floating rate bonds, STRIPS Coupon bearing bonds, floating rate bonds, Government guarantee bonds & debentures PSU bonds- taxable & taxfree, debenture, commercial papers & deep discount bonds Zero Coupon Bonds, floating rate bonds, debenture, commercial papers , Secured premium notes, bonds & Inter corporate bonds, Certificates of deposits, bonds, debenture. Certificates of deposits, bonds,

Central Government

State Governments

Public Sector bonds

Government agencies & statuary bodies Public Sector units

Private Sector bonds Corporate

Banks Financial Institutions

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Primary and secondary segments

In the primary market, new debt issues are

floated either through public prospects, right issues or private placement.

The private placement bears lower cost of

raising funds.

Now, corporates are required to report

details of resources raised through private placements to the stock exchanges like NSE & BSE

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Trading of Debt Instruments

Debt instruments are traded on

Over the Counter Exchange of India (OTCEI), Bombay Stock Exchange (BSE), Wholesale Debt Market (WDM) segment of

National Stock Exchange (NSE)

The clearing and settlement of the trade is undertaken through the clearing
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Presently, bond deals in India are struck over

the phone, following which the players report the transaction on Negotiated Dealing System (NDS). matching and details of the transactions take place on the NDS.

RBI watches the price discovery, order

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The Government Securities Market

Introduction: Government needs money for following purposesTo render public services like law & order,

justice & national defense smoothly

Central Banking & monetary regulation Regulating economic activity in the private

sector

Creation and maintenance of physical

infrastructure

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Government may raise funds by issuing

long term or short term securities. government guarantee,

Since, these securities are backed by Therefore, these are treated as risk free

financial instruments.
Rate of Interest on Government securities

referred as risk free rate for long term & T bills rate of interest is taken for short term.
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Importance
Provides resources to the government for Acts as benchmark for pricing corporate

meeting its short term & long term needs. papers of varying maturities.

Support the implementation of fiscal policy. Provide highest type of collateral for

borrowing against their pledge.

Government securities are traded for long

term & short term periods depends on the coupon rate & period of maturity.
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Treasury bills Government dated securities

Types of Instruments under Government Securities Market

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STRIPS
It is process of stripping a conventional

coupon bearing security in to number of zero coupon securities which can be traded separately. provides a continuous market which ultimately helps in improving liquidity.

It increases breath of the market and

STRIPS allows the issuer to issue securities

with long term maturities for any amount.

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Interest rates in primary market

The interest rate in the primary market are

influenced by

the prevailing liquidity conditions, RBIs intervention by the way of development private placement, & amount and frequency of issues during the

year.

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The RBI accept the private placement of

government stock and release them to the market when interest rate expectations become favorable. impact of large borrowings by the central government.

This policy of RBI moderates the adverse

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Yield curve and yield spread

The shape of the yield curve reflects the

relationship among yields of securities that differ only with respect to their term of maturity. higher amount of yield than its counterpart.

In general, long term maturity assumes

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The yield curve is drawn against two axes:

the vertical showing yield and the horizontal giving the term in years.

The precise shape of the yield curve varies

slightly from day to day and can change significantly from month to month.

If long term interest rates rise relative to

short-term interest rates, the curve steepens and if short term interest rates rise relative to long term rates, the curve flattens.
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Yield Curve

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Subsidiary General Ledger Account

The RBI acts as a depository cum clearing

house.

Settlement is done through accounts

maintained with the RBI, is called the Subsidiary General Ledger (SGL) accounts.
Every participant of the government

securities market maintains SGL and current account with the RBI. amounts with RBI have to facilitate to open constitute SGL accounts or SGL II accounts 4/8/12 with banks who have direct SGL accounts.

Those not eligible to maintain direct

The RBI has permitted the National Securities Clearing Corporation

Limited (NSCCL),

banks, insurance companies, financial institution and primary dealers

to offer constituent SGL account facility to an investor who is interested in participating in the government securities market.
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Primary Dealer
A dealer in government debt with whom

reserve bank of India transacts business. in India in 1994, & it became operational since then.

The system of primary dealers was created

This system has been developed in

consideration of following objectives. Primary Dealership (India) Pvt. Ltd. & SBI DFHI Ltd. etc. (www.sbidfhi.com)
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Example - ICICI Securities Ltd., HSBC

Objectives
To strengthen the infrastructure in the

Government Securities Market (GSM) in order to make it vibrant, liquid & broad based. market capabilities for government securities.

To insure development of underwriting and

To improve the secondary market trading

system, which would contribute to price discovery, enhance liquidity and turnover, and encourage voluntarily holding of government securities among 4/8/12wider the investor base.

To make Primary Dealers (PDs) an effective

conduit for conducting Open Market Operations (OMOs).

To help the placement of government

securities in primary issues by committed participation in auction. giving two way quotes.

To provide active secondary market by To provide signals to the Central

Government for market interventions.

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The Negotiated Dealing System

The Reserve Bank introduced the

Negotiated Dealing System (NDS) with a view to reforming the secondary market in government securities and money market operations, introducing transparency and facilitating electronic bidding in auctions. 2002, with 41 participants.

It came in to operation on 15 February

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The NDS provides an online electronic bidding

facility in the primary auctions of central/state government securities, OMOs/LAF auctions. reporting of transactions in money market instruments including repo, secondary market transactions in government securities and dissemination of information on trades with the least time lags.

It enable screen based electronic dealing and

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