Knowledge Bank


Debt Market Participants & Role of RBI

Issuers in the Market:

1. Government
2. The RBI, for the centre
3. The States
4. Municipalities
5. Companies
6. Public Sector Units
7. Private Companies
8. Banks

Lenders in the Market:

1. PS financial institutions
2. Public Sector Units
3. Fil
4. Insurance Companies
5. Provident Funds
6. Mutual Funds
7. Corporate Treasuries
8. Charitable Institutions
9. Banks

RBI appointed primary dealers sell G-Secs.
Bilateral placement dominates for corporate dept.

Primary Market:

  • NSE for G-Secs
  • Brokers for corporates

Here we can see the various issuers of debt instruments & various lenders and we have primary dealers performing the role of underwriter of government issues. Interestingly, there are entities featuring on both sides like banks, however entities like Mutual Fund (MF)/Provident Fund (PF)/Insurance Companies are allowed to participate in debt market only as lender.

Central and State Governments participate in debt markets to raise money to fund budgetary deficits and other short term and long term deficits. When the central or state governments participate in the debt markets RBI acts as the investment banker to the govt., participating in open market operations, maintaining price stability and ensuring adequate flow of credit to productive sectors. They also appoint primary dealers who act as market intermediaries performing the role of underwriters of the debt instruments.

The corporate debt market basically contains PSU bonds and private sector bonds. The Indian primary Corporate Debt market is basically a private placement market with most of the corporate bonds being privately placed among the wholesale investors, which include corporate & other large investors.

 RBI acts as the investment banker to the government participating in open market operations, maintaining price stability and ensures adequate flow of credit to productive sectors. Its four chief weapons are

Open Market   Operations (OMO)

RBI sells or buys government securities in open market transaction depending upon whether it wants to increase the liquidity or reduce it.

Reserve Requirements (CRR and SLR)

CRR, or cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation. CRR is a blunt weapon, which directly removes liquidity from the system. RBI does not pay any interest on this money to bank. Consequently, when RBI is adopting an expansionary monetary policy, i.e., when reviving growth and reducing inflation is not the main agenda, the CRR is reduced. Again, this has a direct and immediate impact on the liquidity.

Statutory Liquidity Ratio (SLR) refers to the amount that all banks require maintaining in cash or in the form of gold or approved securities. Here by approved securities we mean, bond and shares of different companies. It is the amount which a bank has to maintain in the form of either Cash or Gold valued at a price not exceeding the current market price or Unencumbered approved securities (Govt. securities or Gilts come under this) valued at a price as specified by the RBI from time to time.

The Objectives of SLR are

● To restrict the expansion of bank credit.
● To augment the investment of the banks in Government securities.
● To ensure solvency of banks.
● A reduction of SLR rates looks eminent to support the credit growth in India.

The SLR is commonly used to contain inflation and fuel growth, by increasing or decreasing it respectively. This counter acts by decreasing or increasing the money supply in the system respectively. Generally this mandatory ratio is complied by investing in Govt. bonds.

Repo - Repurchase Obligation

It is the interest rate which RBI charges to banks for collateralized short-term loan is known as the Repo Rate. In case of tight liquidity conditions (as witnessed in 2008), when banks need funding for the short term, they approach the RBI and ask for a temporary loan. RBI gives them a loan only after taking some collateral. This collateral is Govt. Securities (G-Secs). The interest rate which RBI charges to banks for such short-term loan is known as the repo rate. After the short-term period is over, banks have the obligation to repay the money back to RBI, along with the interest and ‘buys back’ its G-Secs, hence the word repurchase obligation.

Reverse Repo

Reverse Repo is that rate which RBI pays to banks. It is the inverse of Repo. When banks have surplus liquidity and there are not enough borrowings from banks by consumers, banks park their surplus money with RBI and earn some minimum interest. The rate at which RBI pays interest is known as reverse repo rate.

It is only logical that Repo Rate will always be more than Reverse Repo Rate.

Bank Rate

It is the interest rate or discount rate at which banks, FIs and other approved entities in the interbank market can get financial accommodation from RBI.
Please refer to for current CRR,SLR,Repo/Reverse Repo, & Bank rates.

Debt Market Instruments

Call/notice money market

The most important feature of a money market instrument is that it is liquid and can be turned over quickly at low cost and serves the role of equilibrating the short-term liquidity position of banks. Under call money market, funds are transacted on over-night basis and under notice money; funds are transacted for the period between 2-14 days.

Banks borrow in this money market for the following purpose.

● To fill the gaps or temporary mismatches in funds
● To meet the CRR & SLR Mandatory requirements as stipulated by the central bank
● To meet sudden demand for funds arising out of large outflows

Collateralized Borrowing and Lending Obligation (CBLO)

CBLO is a mechanism to borrow and lend funds against securities for maturities of 1 day to 1 year. It is a variant of liquidity adjustment facility, permitted by RBI & launched by Clearing Corporation of India Ltd (CCIL). It is a tripartite repo transaction involving (CCIL) as 3rd party, which functions as intermediary or common counter party to borrower as well as lender.

CBLO is expected to meet the needs of banks, FIs, PDs, MFs, NBFCs and companies for deploying their surplus funds, which have been phased out of the call money market operations.

CBLO is issued at a discount to face value. Under CBLO, securities of borrower will be held in their constituent Subsidiary General Ledger account (SGL) account opened with CCIL and will not be transferred to lender

Certificate of Deposits (CDs)

CDs are negotiable money market instrument issued in demat from as Promissory Notes (PNs) having maturity of 7 to 365days. CDs are like bank term deposits but unlike traditional time deposits there are freely negotiable and are often referred to as Negotiable Certificates of Deposit. CDs are rated by approved rating agencies which considerably enhance their tradability in the secondary market, depending upon demand. They are issued on. Zero coupon basis. Financial Institutions are allowed to issue for a period between 1 year and up to 3 years.

Treasury Bills (T-Bills)
T-Bills are short term (up to one year) borrowing instruments of the government of India & auctioned through RBI which enable investors to park their short term surplus funds while reducing their market risk.

They are issued at a discount to face value i.e. zero coupon basis. On maturity the face value is paid to the holder.

Commercial Paper (CP)

Commercial paper is an unsecured money market instrument issued in form of PNs to enable highly rated corporate borrowers to diversify their sources of short-term borrowings. It was introduced in India in 1990 with a view to provide an additional instrument to investors. Subsequently, primary dealers were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations. The tenure of CPs can be anything between 7 days to one year, though the most popular duration is 90 days. They are issued at a discount to face value i.e. zero coupon basis. Only a scheduled bank can act as an Issuing and Paying Agent (IPA) for issuance of CP.

A corporate would be eligible to issue CP provided: (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and (c) the borrowal account of the company is classified as a Standard Asset by the financing banks/institutions.

Government Securities (G-Secs or Gilts)

Like T-bills, gilts are issued & auctioned by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by parliament in the finance Bill each year (Union Budget). Typically, they have a maturity ranging from 1 year to 30 years. Normally, Government Securities are issued as semi-annual interest bearing dated to market risk. Their prices tend to fall when interest rates rise and their prices go up when interest rates fall. They are also referred to as SLR securities in the Indian markets as they are eligible securities for the maintenance of the SLR ratio by the banks.

The attraction for investments in G-Secs is that they carry the sovereign risk or Zero Default risk and enjoy the greatest amount of safety possible. The returns earned on the government securities are normally taken as the benchmark rates of return and are referred to as the risk free return in financial markets. The risk free rates obtained from the G-Secs rates are often used to price the other non-govt.securities in the financial markets.

Non-Convertible Debenture (NCD)

This is a type of debt instrument that is issued for a fixed maturity and in which no part of the debenture is convertible into equity. The face value of the debenture is redeemed in one installment (a bullet payment) or in tranches. Typical redemption periods range from 5 years to 10 years. Interest is normally paid quarterly or half yearly. The interest rate that is offered varies from company to company. The interest that is earned by investors on the debenture is taxable.

NCDS can be either secured or unsecured. Secured NCDs are one which creates a charge on the assets of the company which may be fixed or floating whereas NCDs which are issued without any charge on assets are unsecured or naked debenture. The face value of the debenture is redeemed in one installment (a bullet payment) or in installment. Credit rating of investment grade is mandatory as per SEBI guidelines.

Special Purpose Vehicle (SPV)

A SPV is an entity specially Created for doing the securitization deal. It invites investments from investors, uses the invested funds to acquire receivable of the originator and then uses the realizations from the receivables transferred to it to pay the investors, thereby giving them a reasonable return. An SPV may be a trust, corporation, or any other legal entity.

Pass Trough Certificate (PTC)

A PTC is an instrument which signifies transfer of interest in the receivable in favour of the holder of the PTC. The investors in a pass trough transaction acquire the receivables subject to all their fluctuations, prepayment etc. The material risks and rewards in the asset portfolio, such as the risk of interest rate variations, risk of prepayments, etc. are transferred to the investors.

Mortgage-backed certificate are the most common type of pass-trough, where homeowners’ payments pass from the original bank trough a government agency or investment bank to investors.

The illustration in the next sheet puts all the investments discussed so far in a single view to enable ease in understanding & comparison.






Central Government



20-30 years

RBI, Banks, Insurance companies, Provident Funds, Manual fund, PDs

Central Government

T-Bills Securities


RBI, Banks, Insurance companies, Provident Funds,

State Government



5-13 years

Banks, Insurance companies, Provident Funds,


Bond Structured Obligation

5-10 years

Banks, Insurance companies, Corporate, Provident Funds, Manual fund




1-12 Years

Banks, Mutual Funds, Corporate, Individuals





15 days to

1 years


Bank, Corporate, Financial Institutions, Manual Funds





of deposits (CDs)

15-Days to

1 years


Banks, Corporations, Individuals, Companies, Trusts, Funds,

Associations, FIs, NRIs

Financial Institutions

1 year to

10 years


Commercial Banks

Bank Bonds

1-10 Years

Corporation, Individual ,

Companies, Trusts, funds,

Associations FIs, NRIs


Municipal Bonds

0-7 Years

Banks, Corporations, Individuals, Companies, Trusts, Funds,

Associations, FIs, NRIs


Debt Market Risk Factors

Interest Rate Risk is defined as the risk emerging from an adverse change in the interest rateprevalent in the market so as to affect the yield on the existing instruments. A good case would be an upswing in the prevailing interest rate scenario leading to a situation where the investors’ money is locked at lower rates whereas if he had waited and invested in the changed interest rate scenario, he would earned more.

Credit/Default Risk is defined as the Risk that an issuer of a bond may be unable to make timely payment of interest or principal on a debt security or to otherwise comply with the provisions of a bond indenture and is also referred to as credit risk.

Call Risk arises if the bond has been issued with a call option, the issuer may call them back if the interest rates fall & return the investment to the investors.

Reinvestment Rate Risk is defined as the probability of a fall in the interest rate resulting in a lack of options to invest the interest received at regular intervals at higher rates at comparable rates in the market.

The following are the risks associated with trading in debt securities…….

Counter Party Risk is the normal risk associated with any transaction and refers to the failure or inability of the opposite party to the contract to deliver either the promised security or the sale-value at the time of settlement.

Price risk refers to the possibility of not being able to receive the expected price on any order due to an adverse movement in the prices.

Liquidity Risk the ease at which investment in a bond can be liquidated or sold at a price near its value.

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