The debt market is much more popular than the equity markets in most parts of the world. In India the reverse has been true. Nevertheless, the Indian debt market has transformed itself into a much more vibrant trading field for debt instruments from the rudimentary market about a decade ago. The sections below encompass the transformation of government and corporate debt markets in India along with a comparison of the developments in equity market. Developments in Government Bond Market Prior to 1992, money was collected and lent according to Plan. Lacunae in institutional infrastructure and inefficient market practices characterized the government securities market. In fact the sole objective pursued was to keep the cost of government borrowing as low as possible. If planning went awry, the government sent word to its banker. The central bank made a few phone calls to the heads of banks and bonds were issued and the money arranged. No questions asked, no explanations given. The GOI bond market did not use trading on an exchange. It featured bilateral negotiation between dealers. The market thus lacked price-time priority and the bilateral transactions imposed counterparty credit risk on participants. This narrowed down the market into a “club” with homogeneous credit risk. This was the state of the government debt market in India ten years ago. The major thrust of Financial Reforms commenced in 1992. This was when the contours of the debt market began taking shape. The idea of the financial reform movement was to have more and more different markets and not necessarily have whole financial intermediation left to the banks. The reform process attempted at doing away with regulations in favour of controls based on market forces i.e. an era where the interest rates are governed more by the market forces of demand and supply and less by centralized supervision. Slowly, but steadily, the market grew, adding fresh players and... [continues]
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