Role of Debt Market and its impact on Financial Stability: analysis of Indian Market

Abstract

This study presents an empirical evidence of the primary debt market in India. Bond markets rarely fulfill the alternate role to bank financing in India. The benefits of bond markets include diversifying credit risks across the economy by providing an alternative to conventional bank lending. Bond markets supply long-term funds for the growth of the infrastructure or other sectors to fulfill long-term investment needs. It can also lower funding costs of the firm by liquidity premium on secondary market. They provide diversity in financial products with flexibility to meet the specific needs of investors and borrowers. These benefits in the form of financial instruments and efficiency of the financial system with allocation of capital in the economy (Dudley and Hubbard, 2004; Turner, 2002, and Lian, 2002), reduced exposure to foreign exchange risk and financial crises, and the facilitation of monetary policy. The corporate debt market in India basically comprises PSU bonds and private sector bonds. The corporate debt market in India has historically demonstrated poor participation from the corporate sector. Quality of issued papers, lower investor base, inadequate liquidity, etc, has been the hindrances. Based on an empirical analysis of the corporate debt market, this study attempts to analyze the corporate debt market in India and suggest policy measures to manage investor participation and activate the corporate debt market. Timing of an issue and the conditions of the economy including the triggers in other markets could impact the activity in the whole sale debt market. Issues that satisfy the needs of investor segments could improve participation. We attempt to test few hypotheses; whether bond issuance and factors in other markets could be positively correlated, whether the presence of good issuers (good papers) improve participation, etc using data from the whole sale debt market, whether the limits on government borrowings could improve the trades in the wholesale debt market, etc.