Debt market in India has been dominated by the government securities. The non-remunerative yields and captive nature of the government securities market had liquidated the secondary market activities. This article discusses the imperatives of debt markets.

The debt market in India continues to be dominated by the government securities market. Although there have been so many reforms in the government securities market leading to a 16-fold rise in the primary issuance of government securities during the 1990s, the corporate debt market still continues to be very small. For example, only 21% of the aggregate primary debt issuance in the year 2003-04 was from this market. I will first discuss what the imperatives of the debt market are, then discuss the government securities market, then the corporate debt market, and then finally present some concluding remarks.

One can list three important cannons of a good debt market. First and foremost is a good and diversified debt market along with the equity market in a diversified financial system of banks, and non-banks. What it does is that it enables a bit of pooling and sharing of risks among investors and borrowers. More importantly, a developed debt market acts as a backstop for the banking system and has the potential of moving the crisis outside the banking system.

As far as the government securities market is concerned, there is a fairly well-developed government securities market and it facilitates a market-based conduct of monetary policy and provides a domestic risk-free rupee yield curve which serves as a benchmark for the prices of other securities. We all know that the reforms started in early 1991, and the financial sector reforms started in 1992-93. The government securities market before the reforms in 1992-93 was not developed well enough, because of the lack of proper institutional infrastructure, as well as the regulations which prevailed until that point of time.

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