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SECURITY ANALYSIS AND

PORTFOLIO MANAGEMENT




ANALYSIS OF DEBT MARKET


















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ACKNOWLEDGEMENT

This is to certify that the project given by Atul Sir has been duly completed and
submitted on time. It has helped us in enhancing our knowledge.
I thank Atul Sir for the unstinted support towards the completion of the project.
I would also like to thank my parents for the help and support to successfully complete
the project on time.











































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INDEX

Sr No. Particulars Page
Number
1 Introduction 4
2 Benefits and Factors affecting the
Debt Market
5
3 Participants in the Debt Market 7
4 Impact and Future expectations from
Debt Market
9
5 Conclusion 10
6 Bibliography 11



















INTRODUCTION

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Define Debt Market

Debt market refers to the financial market where investors buy and sell debt securities,
mostly in the form of bonds. These markets are important source of funds, especially in
a developing economy like India. India debt market is one of the largest in Asia. Like all
other countries, debt market in India is also considered a useful substitute to banking
channels for finance.

The most distinguishing feature of the debt instruments of Indian debt market is that
the return is fixed. This means, returns are almost risk-free. This fixed return on the
bond is often termed as the 'coupon rate' or the 'interest rate'. Therefore, the buyer (of
bond) is giving the seller a loan at a fixed interest rate, which equals to the coupon rate.

Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Primary Market Segments
Governments Securities (G- SEC) e.g. T bills, floating rate bonds, zero coupon
bonds etc.

Public Sector Undertaking (PSU Bonds) e.g. debentures, CP, CD etc.

Corporate Bonds/private sector bonds e.g. CP, CD, zero coupon bonds,
debentures etc.

Secondary Market Segments

Wholesale Debt Market (WDM)
Large investors and a high average trade value characterize.
Zero Coupon Bonds, CP, CD, Corporate Debentures, State Government loans, SLR
and Non-SLR Bonds etc. are major trading instruments.
Retail Debt Market (RDM)
It is known for small investors and low average trade value.
Govt. securities are the instruments traded.




Benefits of Debt Market

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Diversification of financing and investment options.

An instrument for the banking system to manage liquidity and risk in an effective
manner.

Allows central banks to control liquidity.

Financing the developmental activities of govt.

Helps in corporate and government transparency.

A tool for implementing monetary policies.

Reduction in borrowing cost of govt. and private sector.



Factors affecting the Debt Market

Market Interest Rates

Inflation

Credit Rating

Exchange rates

Corporate cash flow













Debt Instruments

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There are various types of debt instruments available that one can find in Indian debt
market.

Commercial Paper (CP): They are primarily issued by corporate entities. It is
compulsory for the issuance of CPs that the company be assigned a rating of at least P1
by a recognized credit rating agency. An important point to be noted is that funds
raised through CPs do not represent fresh borrowings but are substitutes to a part of
the banking limits available to them.

Certificates of Deposit (CD): While banks are allowed to issue CDs with a maturity
period of less than 1 year, financial institutions can issue CDs with a maturity of at least
1 year. The prime reason for an active market in CDs in India is that their issuance does
not warrant reserve requirements for bank.

Treasury Bills (T-Bills): T-Bills are issued by the RBI at the behest of the Government
of India and thus are actually a class of Government Securities. Presently T-Bills are
issued in maturity periods of 91 days, 182 days and 364 days. Potential investors have
to put in competitive bids. Non-competitive bids are also allowed in auctions (only from
specified entities like State Governments and their undertakings, statutory bodies and
individuals) wherein the bidder is allotted T-Bills at the weighted average cut off price.

Long-term debt instruments: These instruments have a maturity period exceeding
1year. The main instruments are Government of India dated securities (GOISEC), State
Government securities (state loans), Public Sector Undertaking bonds (PSU bonds) and
corporate bonds/debenture. Majority of these instruments are coupon bearing i.e.
interest payments are payable at pre specified dates.

Government of India dated securities (GOISECs): Issued by the RBI on behalf of the
Central Government, they form a part of the borrowing program approved by
Parliament in the Finance Bill each year (Union Budget). They have a maturity period
ranging from 1 year to 30 years. GOISECs are issued through the auction route with the
RBI pre specifying an approximate amount of dated securities that it intends to issue
through the year. But unlike T-Bills, there is no pre set schedule for the auction dates.
The RBI also issues products other than plain vanilla bonds at times, such as floating
rate bonds, inflation-linked bonds and zero coupon bonds.

State Government Securities (state loans): Although these are issued by the State
Governments, the RBI organizes the process of selling these securities. The entire
process, 17 rights from selling to auction allotment is akin to that for GOISECs. They
also form a part of the SLR requirements and interest payment and other modalities are
analogous to GOISECs. Although there is no Central Government guarantee on these



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Loans, they are believed to be exceedingly secure. One important point is that the
coupon rates on state loans are slightly higher than those of GOISECs, probably
denoting their sub-sovereign status.

Public Sector Undertaking Bonds (PSU Bonds): These are long-term debt
instruments issued generally through private placement. The Ministry of Finance has
granted certain PSUs, the right to issue tax-free bonds. This was done to lower the
interest cost for those PSUs who could not afford to pay market determined interest
rates.

Bonds of Public Financial Institutions (PFIs): Financial Institutions are also allowed
to issue bonds, through two ways - through public issues for retail investors and trusts
and secondly through private placements to large institutional investors.

Corporate debentures: These are long-term debt instruments issued by private
companies and have maturities ranging from 1 to 10 years. Debentures are generally
less liquid as compared to PSU bonds.


Participants in the Debt Market

The market participants in the debt market are:

i. Central governments, raising money through bond issuances, to fund budgetary
deficits and other short and long term funding requirements.

ii. Reserve Bank of India, as investment banker to the government, raises funds for the
government through bond and t-bill issues, and also participates in the market through
open-market operations, in the course of conduct of monetary policy. The RBI regulates
the bank rates and repo rates and uses these rates as tools of its monetary
policy. Changes in these benchmark rates directly impact debt market sand all
participants in the market.

iii. Primary dealers, who are market intermediaries appointed by the Reserve Bank
of India who underwrite and make market in government securities, and have access to
the call markets and repo markets for funds.

iv. State Governments, municipalities and local bodies, which issue securities in the
debt markets to fund their developmental projects, as well as to finance their budgetary
deficits.





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v. Public sector units are large issuers of debt securities, for raising funds to meet the
long term and working capital needs. These corporations are also investors in bonds
issued in the debt markets.

vi. Corporate treasuries issue short and long term paper to meet the financial
requirements of the corporate sector. They are also investors in debt securities issued
in the market.


vii. Public sector financial institutions regularly access debt markets with bonds for
funding their financing requirements and working capital needs. They also invest in
bonds issued by other entities in the debt markets.

viii. Banks are the largest investors in the debt markets, particularly the treasury bond
and bill markets. They have a statutory requirement to hold a certain percentage
of their deposits (currently the mandatory requirement is 25% of deposits) in
approved securities (all government bonds qualify) to satisfy the statutory liquidity
requirements. Banks are very large participants in the call money and overnight
markets. They are arrangers of commercial paper issues of corporate. They are also
active in the inter-bank term markets and repo markets for their short term funding
requirements. Banks also issue CDs and bonds in the debt markets.

ix. Mutual funds have emerged as another important player in the debt markets, owing
primarily to the growing number of bond funds that have mobilized significant
amounts from the investors. Most mutual funds also have specialized bond funds such
as gilt funds and liquid funds. Mutual funds are not permitted to borrow funds, except
for very short-term liquidity requirements. Therefore, they participate in the debt
markets pre-dominantly as investors, and trade on their portfolios quite regularly.

x. Foreign Institutional Investors are permitted to invest in treasury and corporate
bonds, an amount not exceeding 30% of their portfolio exposure to Indian markets.

xi. Provident funds are large investors in the bond markets, as the prudential
regulations governing the deployment of the funds they mobilize, mandate investments
pre-dominantly in treasury and PSU bonds. They are, however, not very active traders
in their portfolio, as they are not permitted to sell their holdings, unless they have a
funding requirement that cannot be met through regular accruals and contributions.

xii. Charitable Institutions, Trusts and Societies are also large investors in the debt
markets. They are, however, governed by their rules and byelaws with respect to the
kind of bonds they can buy and the manner in which they can trade on their debt
portfolios.


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Impact of the Debt Market on the Economy

Opportunity for investors to diversify their investment portfolio.

Higher liquidity and control over credit.

Better corporate governance.

Improved transparency because of stringent disclosure norms and auditing requirements.

Less risk compared to the equity markets, encouraging low-risk investments. This leads
to inflow of funds in the economy.

Increased funds for implementation of government development plans. The government can
raise funds


Future Expectations from Indian Debt Market

Infrastructure financing through debt

Investor base needs to be broadened

Widening the issuer base trading, development of trade reporting system

Innovative instruments for debt market

No discrimination among g-sec and corporate debt

















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CONCLUSION

Debt management in India has clearly come a long way from a passive system to a
market driven exercise with developed institutions, instruments and markets.

In terms of international benchmarks, India ranks on par with some of the developed
countries in areas like institutional framework, risk management set-up, market
development, clearing and settlement procedures and transparency in debt
management operations

The artificially administered interest rate system of government securities market has
transformed into a market determined one, and an inactive thin secondary market has
grown into an actively traded and reasonably liquid market.























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BIBLIOGRAPHY


http://business.mapsofindia.com/india-market/debt.html
http://www.scribd.com/doc/19465232/Debt-Market-in-India-Key-Issues-
Policy-Recommendations#download
http://www.scribd.com/doc/115436660/study-of-debt-market#download
http://www.marketoperation.com/fixed-income/indian-debt-market.htm
http://www.thestreet.com/story/1087488/1/the-bond-market.html
http://www.akcapindia.com/Knowledge.aspx?linkId=0458F7F3-DFA5-4007-
AB7A-B654FCA6F86C
http://www.thestreet.com/story/1087488/1/the-bond-market.html