INDIA: An Introduction to Capital Markets: Debt
The Indian debt market, valued at INR2.64 trillion (USD31.68 billion), is undergoing significant changes. A strong domestic appetite for capital and credit from companies, healthier corporate and bank balance sheets and India’s rapid and sustained economic growth have acted as the galvanising forces for enabling this growth in India’s debt market, along with changes in the US treasury yields and rising geopolitical tensions.
The debt market in India promises a steep growth in FY 2026 considering a major shift in infrastructure and green bond financings due to regulatory reforms and innovative strategies aimed at enhancing transparency, market participation, ease of doing business and liquidity. Alternative financing options like green debt are gaining traction, reflecting a growing commitment to sustainability. A range of institutions, including state-owned power corporations, national banks, development banks, non-banking financial companies and infrastructure debt funds have opted for debt funding from the domestic market which has boosted several conglomerates to tap into the domestic debt capital market as well. In 2024, India successfully raised over USD10 billion through green bonds, solidifying its position as a leading emerging market in sustainable finance.
The economic trends of developed economies including the US, EU and China tend to have considerable impact on investor sentiments towards India’s debt market, which typically stem from fluctuations in interest rates and inflation policies of these developed economies. December 2024 depicted this impact wherein the India-US bond yield spread contracted to a two-decade low of 227 basis points, resulting in Indian debt securities becoming less lucrative to foreign portfolio investors who aimed for higher returns.
Interest of foreign investors has swelled up in the Indian debt markets and a key indicator being inflow of USD1.314 billion funds in the month of August 2024. It has been viewed that such surge in inflow could be due to India’s inclusion in JP Morgan’s Emerging Market government bond indices in June 2024, which was a remarkable achievement for India.
Regulatory Shift
In FY 2025, the Securities and Exchange Board of India (SEBI), the Indian securities market regulator, has proactively demonstrated its objective towards ensuring transparency in the Indian debt market landscape. With proposals of standardising various formats, SEBI aims to streamline the listing process, ensure greater clarity and consistency in the manner debt securities are issued and listed in India. SEBI has tasked an industry body to draw up standard templates for key transaction documents such as the debenture trust deed (for different kinds of debt securities) which they expect to be used as a standard draft for all listed debt issuances. These measures are designed to safeguard investor rights and foster trust in the market. In order to encourage issuers to list their existing debt securities, SEBI has relaxed the ISIN limit by excluding unlisted ISINs which were subsequently converted into listed ISINs from the maximum limit of ISINs maturing in a financial year, thus reflecting a shift towards promoting listing by all corporate entities with varying asset size.
Regulatory reforms are paving the way for more participation from retail investors, with the most notable being the reduction of face value of privately placed debt securities from the present denomination of INR100,000 to INR10,000 (USD1,163.0 to USD116.3). Despite the huge market size, retail participation remains less than 2%, depicting huge untapped potential and a vital role that retail investors could play in the forthcoming years.
USD Bonds Paving Their Way
Issuance and listing of debt securities in the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC) has seen exponential growth in the past financial year. The seamless listing process and limited periodic compliances along with trust from foreign investors has aided in making GIFT IFSC a lucrative destination for market participants, thus creating a venue for foreign currency borrowings by the Indian corporate and public sector entities. Banking assets have crossed the USD70 billion billion mark, and transactions have exceeded USD975 billion billion as of September 2024. As of 31 December 2024, total debt listings at GIFT IFSC for FY 2025 were recorded at USD7.17 billion, which was higher compared to total debt listings during FY 2024, recorded at USD5.84 billion.
Challenges and Roadblocks
While there has been a tremendous growth in opportunities in the Indian debt market, investors remain apprehensive to invest in debt instruments due to their low-risk appetite, as a result of which high-rated bonds remain the most sought-after bonds. Long-drawn processes and ineffective frameworks further deter and add scepticism towards investment in Indian debt securities. A decline has been observed in the public issue of corporate bonds from 12% of total issuances in 2014 to 2% in 2024, with USD96.890 billion raised through private placements compared to just USD2.197 billion via public routes in FY 2024. Given that the public issuances legislate transparency of price discovery, SEBI has actively taken steps to promote public issuances of debt securities by streamlining the process and easing compliance requirements.
In order to make Indian debt markets significantly accessible and investor friendly, the Indian government must take adequate action and implement necessary guardrails for the protection of investors’ interests. This will lead to a surge in foreign participation, mitigating the crowding-out effect in domestic debt markets.
Future Outlook
India’s debt capital market is at a critical juncture and holds promising growth potential with increasing investor confidence and abundant opportunities. Despite systemic challenges, collaborative efforts between regulators and market participants, coupled with dynamic regulatory changes, pave the way for overcoming hurdles and can foster a more diverse and robust debt market. With a promising growth trajectory and evolving financial landscape, India’s debt markets are well-positioned for sustainable economic development and inclusive growth.