Thursday, May 2, 2013

Components of the Indian Debt Market


As we saw in the previous article the Debt Market in India is growing at a rapid pace and is becoming increasingly interesting for Investors worldwide. Any market has a number of components or should I say participants. The Components of the Indian Debt Market include:

1. Investors - You and Me
2. Regulators
3. Debt Market Segments

The purpose of this article is to understand more about the Regulators of the Indian Debt Market and the broad classifications of the Instruments available in the Debt Market.

The Indian debt market can be broadly classified into four Segments. They are:

1. Money Market
2. Bank and Corporate Deposits Market
3. Government Securities Market
4. Corporate & PSU Bond Market

Let us now look at them one by one...

Money Market:

Money market refers to the market where the requirement or arrangement of funds is for a short-term. Short-term refers to a period of less than one year. As such money market instruments have a maturity of less than one year. The most active part of the money market is the market for inter-bank overnight (i.e. less than a day) call and term money between banks and institutions and repo transactions (banks' borrowing window from the RBI).

Some of the commonly used Money Market Instruments include:

1. Certificate of Deposits (CDs)
2. Commercial Papers (CPs)
3. Inter-Bank Participation Certificates
4. Inter Bank Term Money
5. Treasury Bills
6. Bill Rediscounting, Call / Notice / Term Money
etc.
Money market instruments are mainly used by Banks and other institutions to meet their short term cash requirements.

Bank and Corporate Deposits


Bank fixed deposits (FDs) are very common amongst the investors as a traditional investment avenue for decades. The tenure of bank fixed deposits range from 7 days to 10 years. Corporate deposits are nothing but fixed deposits where the issuer is a company or an institution other than a bank. Over here the interest rates vary depending upon the credit quality of the issuer.

Stories of Deposit Co.’s cheating investors by promising high returns have headlined numerous newspapers in India but still the Investor population of this country still continue to fall prey to false promises and greed. Any Debt Instrument that offers more than 10% returns has a high probability of going bust and you must never and I mean never trust them. Even if you are slightly tempted to try these out, limit your exposure to a few thousand rupees. Do not invest in lakhs and then feel for it in future!!!

Independent rating agencies assess the credit quality of the company and assign the rating indicative of the risk involved in the investment. Thus, higher the credit rating lower is the interest rate offered and vice-a-versa. However, sometimes companies raise money without securing a credit rating from independent rating agencies. In such cases companies often pay higher interest to attract investors. In such cases, Investors must be cautious and not invest too much money in a single company.

Government Securities Market

G-Secs or Government Securities are debt papers issued by the Government with a face value of a fixed denomination. In India, G-secs are issued by Government of India at face value of Rupees One Hundred in lieu of their borrowings from the market. These can be referred to as certificates issued by Government of India through the RBI acknowledging receipt of money in the form of debt, bearing a fixed coupon or interest rate (or otherwise) with interests payable semi-annually or otherwise and principal as per schedule, normally on due date of redemption.

Government Securities includes all Bonds, T-bills and instruments issued by the Central Government and State Government. These securities are normally referred to, as ‘gilt-edged’ as repayments of principal as well as interest are totally secured by sovereign guarantee and are 100% safe.

Corporate & PSU Bond Market

Corporate Bonds are issued by Public Sector Undertakings (PSUs) and private corporations in India. These bonds are issued for a wide range of tenors. The normal tenors range from 1 year to 15 years. As compared to Government Securities which are free of default risk; corporate bonds may turn out to be risky. This riskiness depends on the issuing company’s credit rating, the business into which the
company is in, the sector in which the company operates and the prevailing market conditions. As with corporate deposits, each issue comes with a Credit Rating which is assigned by a credit rating agency. This rating determines the risk involved and as always, higher the risk, higher will be the interest offered.

Regulators of the Indian Debt Market

Like any other market which needs to be regulated for its smooth and efficient functioning, the debt market in India is regulated by Reserve Bank of India (RBI) along with the Securities and Exchange Board of India (SEBI). Of the four major segments outlined just above, some are regulated by SEBI and some by RBI.

Reserve Bank of India

The RBI has the Money market and the G-Secs market under its purview. Apart from its regulatory role it also performs several other important functions such as managing the borrowing program of the Government of India, controlling inflation (by managing policy/interest rates in the country), ensuring adequate credit at reasonable costs to various sectors of the economy, managing the foreign exchange reserves of the country and ensuring a stable currency environment.

Moreover, the RBI controls the issuance of new banking licenses to banks. RBI also controls the manner in which various scheduled banks raise money from depositors. Further, it controls the deployment of money through its policy measures on Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), priority sector lending, export refinancing, guidelines on investment assets etc.

Securities and Exchanges Board of India

The SEBI acts as the regulator for the corporate debt market and the bond market wherein the entities raise money from the investors through a public issue. The regulation comprises of manner in which the money is raised and tries to ensure a fair play for the retail investors. It forces the issuer to make the retail investor aware of the risks inherent in the investment, through its disclosure norms. SEBI also regulates the Mutual Funds and the instruments in which these mutual funds can invest. Investment from Foreign Institutional Investors (FIIs) also falls under the SEBI’s scanner.

Other Regulators in the Indian Debt Market:

Apart from RBI and SEBI, there are several other regulators which are specific for different classes of investors such as the Central Provident Fund Commissioner and the Ministry of Labor to regulate the Provident Funds. Also, Religious and Charitable trusts are regulated by the respective Government of the state in which these trusts are located.

No comments:

Post a Comment

© 2013 by www.anandvijayakumar.blogspot.com. All rights reserved. No part of this blog or its contents may be reproduced or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the Author.

Google+ Badge

Google+ Followers

Followers

Popular Posts

Important Disclaimer

All the contents of this blog are the Authors personal opinion only and are not endorsed by any Company. This website or Author does not provide stock recommendations. The purpose of this blog is to educate people about the financial industry and to share my opinion about the day to day happenings in the Indian and world economy. Contents described here are not a recommendation to buy or sell any stock or investment product. The Author does not have any vested interest in recommending or reviewing any Investment Product discussed in this Blog. Readers are requested to perform their own analysis and make investment decisions at their own personal judgement and the site or the author cannot be claimed liable for any losses incurred out of the same.