The debt market plays a significant role in the economy of a country. With the scenario of the COVID-19 situation, the Indian debt market is suffering from shallowness. SEBI regulates the corporate debt market and bond markets while RBI regulates the money market and G-Secs. The domestic debt market in India amounts to about 65% of the GDP while the size of India’s corporate bond market is merely 16% of GDP compared with 46% in Malaysia and 73% in South Korea.
The debt market remains firmly unfair towards government securities (G-Secs). The Indian corporate bond market has a low and unstable trading volume.
The central government’s gross borrowings are estimated to rise to 12 lakh crores which aid 51% more than what was budgeted in February. For states also peak debt is now permitted as Rs.10.68 lakh crores, an increase of 66% over earlier permitted Rs 6.4 lakh crores. Only 0.5% of borrowings for the states are unconditional.
In the financial year, the public sector borrowings were in the range of 8-9 percent of GDP. Even at that level, public sector borrowings were more than the net household financial savings which were about 7 percent.
Kotak institutional equities estimated PSBR at 11.3 percentage of the GDP in a report dated April 3.
System liquidity continues to be in a large surplus. The reserve bank of India has opened a special 90 days liquidity facility for mutual funds that are facing redemption pressure. Banks are been borrowing reverse repo rates between Rs7-8 lakhs. The RBIS targeted long term repo operations may bring back some activity to the primary debt market as banks are parking all of the additional liquidity with the RBI.
The reserve bank of India cut the reserve Repurchase rate to free up more cash for lending, fueling a rally in short end bonds even as it dashed market hopes of massive debt purchases from the open market.
The state government announced its increased borrowings; bond yields have remained range-bound after an initial spike. After a shock, at a recent first auction where rates rise, borrowing cost has eased. At the recent state government bond auction, the 10-year state government loans were auctioned at a cut off between 6.72 percent – 6.87 percent.
The debt market has also not behaved ferociously to increased borrowings because of the belief that when needed the RBI will step in. The central bank has also not yet announced the dates for open market operations, not yet also has committed for any direct monetization. Yet of some interventions from secondary market purchases and occasional twists which help market have trust in RBI.
“Central bank will stand ready to take conventional and non-conventional measures when needed” – said the RBI Governor Shaktikanta Das. This step may not be necessary immediately unless the state government decides to allocate borrowings. For the Indian economy to revive and kick start again after the COVID-19, our debt markets have to scale up.