| Introduction Importance of the debt market in a developing economy In a developing economy, mobilisation of financial resources through debt instruments is fundamental to the growth and development of the country. A debt instrument is a financial tool to raise debt capital, which binds two parties with repayment obligations of interest and repayment of debt as specified in a contract. The debt market facilitates the mobilisation of funds from surplus pockets of the economy (investors and lenders) to the needy segment of the economy (borrowers consisting of corporate and government). As per Neeti Ayog's statement for moving towards Vikasit Bharat, it is important that we create a financial ecosystem that supports the creation of long-term capital mobility. Bonds will play a vital role in sustainable financial growth. A deep and vibrant corporate bond market is indispensable to complement the banking system, reduce systemic concentration risks, and provide a stable source of long-term financing for infrastructure, industry, climate actions and emerging sectors. A well-developed corporate bond market can play a pivotal role in achieving a balanced, resilient financial architecture by expanding funding avenues, lowering borrowing costs, and strengthening the transmission of monetary policy. At the same time, benchmarking its performance against global peers to identify pathways for further deepening and diversification is needed. Over the past decade, India's corporate bond market has expanded significantly, with outstanding issuances rising from INR 17.5 trillion in FY2015 to INR 53.6 trillion in FY2025, recording an annual growth rate of nearly 12 percent. The market now accounts for around 15-16 percent of GDP, a considerable improvement, though still well below the levels seen in countries like South Korea, Malaysia, or China. Encouragingly, corporate bond fundraising is increasingly on par with bank credit, underscoring growing investor confidence and the gradual shift toward market-based financing. However, the bond market remains concentrated among top-rated issuers, with private placements dominating issuance and limited participation from MSMEs, retail investors, and foreign portfolio investors. This structural imbalance constrains access to affordable capital for smaller firms and reduces overall market liquidity. Regulatory overlaps between multiple authorities, extensive disclosure requirements, and procedural delays discourage broader participation. The secondary market remains shallow, with limited liquidity and price transparency. Institutional investors, such as insurance companies and pension funds, are constrained by investment norms that limit exposure to lower-rated securities. In addition, weak debt recovery mechanisms, high transaction costs, and tax asymmetries reduce investor appetite and restrict the flow of long-term capital. These structural frictions collectively impede the corporate bond market from realising its full potential as an engine of capital formation and financial inclusion. Debt market overview Debt instruments are basically financial contracts or legal agreements through which the investor lends money to borrowers in exchange for regular interest / coupon payments and return of principal amount invested at the end of a pre-determined maturity period. There are many kinds of debt instruments, viz, bonds, debentures, commercial papers, certificates of deposits, treasury bills, besides regular loan products. Short-term instruments like T-bills, commercial papers, and CDs are called money market instruments, whereas long-term papers like sovereign bonds (central and state government bonds and municipal bonds) and corporate bonds are called debt securities. Besides offering predictable and stable returns, these instruments carry less risk in terms of volatility as compared to equities / stocks. The debt markets, in a developing country like India, play an important role as a source of funds. The debt market of a country is a critical component of the overall financial system. The participants in this market include issuers of bonds, investors in bonds and intermediaries, and the issuers essentially raise capital by issuing bonds / debentures or short-term money market instruments. I. The major issuers of debt instruments 1. Government of India: The Government of India issues government securities and treasury bills to meet the budgeted expenditure of the government and government projects or PPP projects. 2. State governments: State governments also raise capital by issuing SDL (State Development Loans). 3. Public sector undertakings and financial institutions: They issue bonds and debentures to supplement their financial needs. 4. Private corporations: Private corporations also issue Non-convertible Debentures to meet their financial requirements, mainly for long-term project needs / investment in plant and machinery, etc. |
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