Chapter 10 Debt Markets Structure, Instruments and Regulation

Global and Indian Debt Markets

The debt market is a cornerstone of any modern financial system, often forming the largest segment of capital markets and serving as the fulcrum for credit allocation and interest-rate formation. Globally, bond markets dwarf equity markets in size. The US bond market alone exceeds USD 35 trillion, with daily turnover above USD 500 billion, making it the largest securities market in the world. At roughly USD 47 trillion, the global bonds market is comparable in scale to the combined GDP of all countries.

India’s debt market, while smaller in absolute terms, is an important component of the domestic financial system. Its size is currently estimated at about USD 150–200 billion, representing nearly 30 per cent of India’s GDP. By outstanding value, the Indian bond market ranks after Japan and Korea among Asian bond markets. In volume terms the debt market is larger than the equity market, and in terms of daily settled activity (2012–13) the combined debt and foreign-exchange markets recorded substantially higher turnover than the equity segment.

Since the economic reforms, the Indian debt market has become reasonably well segmented into private corporate debt, public sector undertaking bonds, and the government securities market. The government securities market dominates activity, accounting for more than 90 per cent of turnover and constituting the principal segment of the country’s debt market.

Evolution and Regulation of India's Debt Market

For much of its history the Indian debt market was a predominantly wholesale arena dominated by a small set of institutional players, chiefly banks. Banks’ heavy presence in the government securities market reflected statutory requirements, while overall turnover remained modest—only a few hundred crores until the early 1990s. The market’s underdevelopment stemmed from an administered interest rate regime that constrained market-based pricing and from alternative investment avenues that often offered higher returns, deterring broader participation.

The early 1990s brought a change in emphasis. Faced with growing financing needs for development and infrastructure, the government recognised the necessity of a more vibrant, efficient debt market and initiated reform measures. The Reserve Bank of India invested substantial effort in developing the government securities segment, improving market infrastructure and mechanisms for trading and settlement. Despite these gains, the private corporate debt market and the bond market for public sector undertakings have continued to lag behind in both volume and liquidity.

A well-functioning debt market is central to an economy’s financial architecture. It mobilises and allocates resources efficiently, finances government development activities, and transmits monetary policy signals through interest rates and market yields. It also supports liquidity management across short- and long-term horizons and provides benchmarks for pricing non-government securities. By offering a range of instruments that match investors’ risk and liquidity preferences, delivering returns appropriate to risk, and generally exhibiting lower volatility and higher safety than many equity alternatives, the debt market has substantial scope for growth. For a developing country like India—where large amounts of capital are required for industrialisation and infrastructure—the deepening of the debt market is therefore both necessary and promising.

Regulation of the debt market in India is shared between the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI): the RBI is responsible for the government securities market and the money market, while SEBI supervises the corporate debt market.

To ensure orderly development and avoid regulatory overlap, the government issued a notification on 2 March 2000 that clarified the split of responsibilities. The notification assigns to the RBI regulation of contracts for the sale and purchase of government securities, gold‑related securities, money‑market instruments, securities derived from these instruments, and ready‑forward contracts in debt securities. Where such contracts are executed on stock exchanges, SEBI will regulate those transactions, but its supervision must be consistent with the guidelines issued by the RBI—thereby aligning exchange oversight with broader monetary and market‑stability objectives.

Money Market–Debt Market Linkages

The money market deals in short‑term debt instruments with maturities of up to one year, whereas the debt market comprises longer‑term debt securities with maturities beyond one year. A well‑functioning money market enhances liquidity by enabling easy trading and efficient liquidity management for short‑term paper, which in turn improves the tradability and price discovery of longer‑dated securities. For this reason, a developed money market is generally regarded as a prerequisite for the emergence and healthy functioning of a robust long‑term debt market.

Characteristics of an Efficient Debt Market

An efficient debt market is marked by a competitive market structure, low transaction costs, robust and secure market infrastructure, and a diverse set of participants. Competition ensures fair pricing and liquidity, while low costs and reliable clearing, settlement and custody arrangements make trading and issuance attractive. Diversity—including banks, insurance companies, mutual funds, pension funds and retail investors—broadens demand and improves market resilience.

Such an efficient market lowers the government’s cost of borrowing by improving demand and price discovery for sovereign debt. It also eases pressure on traditional institutional financing by creating additional funding avenues for corporates and public projects. By offering attractive, liquid financial instruments, a well‑functioning debt market helps mobilize savings that might otherwise remain in unproductive forms, such as idle gold holdings, and channels them into productive investment. Finally, it supports the development of a stable yield curve, which is essential for pricing risk, guiding monetary policy transmission and informing investment and funding decisions across the economy.

Debt Market Participants and Infrastructure

The Indian debt market has evolved into a largely wholesale market dominated by a relatively small number of large players. Most primary issues are placed privately or sold by auction to these participants, while secondary-market trades were traditionally negotiated by telephone. Electronic trading platforms have, however, expanded market access: the NSE Wholesale Debt Market (WDM) has emerged as an active trading venue for debt instruments and, more recently, the BSE has begun trading in debt as well. Primary dealers act as market makers in government securities, and the market has become more diversified with the entry of high‑net‑worth individuals, cooperative banks, large corporates, mutual funds, and insurance companies.

The central government raises funds through dated securities and treasury bills to finance budgetary and other fiscal needs; the Reserve Bank of India acts as the government’s investment banker, handling issuance and debt management operations. State governments, municipalities and local bodies also issue securities to fund deficits and development projects. Primary dealers—appointed by the Reserve Bank—serve as active intermediaries, providing liquidity and facilitating market functioning in both the government securities and money markets.

Public sector undertakings issue both taxable and tax‑free bonds to meet long‑term and working‑capital requirements and also invest surplus cash in debt instruments. Corporates participate on both sides of the market as issuers seeking finance and as investors. Banks are central, captive investors in government securities; they also operate as lenders and borrowers in the call-money market, arrange and invest in commercial paper, issue certificates of deposit for short‑term funding, and raise long‑term resources through bonds.

Mutual funds are among the predominant investors in the debt market and include specialised products such as money‑market and gilt funds; they have become active traders in the market. Insurance companies are permitted to invest in debt instruments within limits set by the IRDA. Foreign institutional investors may invest in government securities and corporate bonds subject to prescribed limits. Provident funds and pension funds are large, long‑term investors in government securities and PSU bonds but are generally not active traders, and charitable institutions and trusts also hold sizeable debt portfolios governed by their bye‑laws.

Satellite dealers once participated in the market, but the Reserve Bank discontinued their involvement from May 2002. Technological and institutional changes have further modernised the market: the Negotiated Dealing System (NDS) has replaced telephone negotiations in the government securities segment, and the Clearing Corporation of India Limited (CCIL) has transformed clearing and settlement. Together, NDS and CCIL have brought about a structural modernization in the debt market comparable to the impact the NSE had on the equity market.

Debt Market Instruments and Infrastructure

The instruments traded in the debt market are grouped into distinct segments, each corresponding to a particular class of debt instruments and market function.

The government abolished stamp duty on debt securities to encourage their dematerialization and thereby deepen trading in corporate debt. Both the National Securities Depository Limited (NSDL) and the Central Depository Services Limited (CDSL) were allowed to admit a wide range of debt instruments into electronic form. These instruments include debentures, bonds, commercial paper and certificates of deposit, whether listed, unlisted or privately placed.

Dematerialization has made it practical for banks to sell debt securities in much smaller lots to corporate clients, provident funds, trusts and other investors. The cost of holding securities in demat form is negligible for most banks, since many act as depository participants (DPs) of NSDL. Demat accounts also allow banks to strip securities—separating principal and interest components—and thereby create a broader retail market for these instruments.

Consistent with this shift to electronic holdings, from October 31, 2001 banks, financial institutions and primary dealers were required to make fresh investments in, and hold, bonds and debentures only in dematerialized form.

The debt market is organised into primary and secondary segments, each with distinct roles and trading conventions. In the primary market new debt is issued through a public prospectus, rights offers or private placement. Private placements have become particularly attractive because they are reportedly much cheaper—often costing around half of what public borrowings do—and corporates issuing such debt are required to disclose details of funds raised to the stock exchanges (BSE and NSE). This disclosure is intended to give investors visibility into intended use of proceeds and the risk–return profile. From mid‑2006 Indian corporates were also allowed to tap the US private placement market; Reliance Industries was the first to do so, raising $300 million on a 10–12 year paper, and further issuances from Indian companies were expected to follow.

The secondary market for debt increasingly runs on electronic platforms operated by exchanges and reporting bodies. Historically most bond deals in India were negotiated by phone and subsequently reported on the Negotiated Dealing System (NDS), which has primarily served as a reporting platform; the Reserve Bank has signalled its preference for NDS to evolve into a venue for price discovery and order matching. To improve transparency, the BSE, NSE and FIMMDA have developed trading and reporting facilities: FIMMDA functions mainly as a reporting platform, while BSE and NSE provide both trading and reporting services. The BSE was the first exchange in India to offer an electronic order‑matching system for corporate and non‑government securities, with settlement through its clearing house.

The National Stock Exchange introduced a dedicated Wholesale Debt Market (WDM) segment at the start of its operations in 1994, and for the first time provided an automated, screen‑based trading system—NEAT (National Exchange for Automated Trading)—that supports an anonymous, order‑driven market and supplies on‑line market information. The WDM segment operates two market modes: a continuous market and a negotiated market. In the continuous market buyers and sellers submit anonymous orders which are matched on a price‑time priority; participants can also set counterparty exposure limits within the NEAT‑WDM framework to manage counterparty risk. The negotiated market, by contrast, comprises trades agreed outside the exchange but subsequently reported to it and disseminated through NEAT; because counterparties are typically known to each other, formal exposure limits are not necessary.

The range of tradable instruments has widened beyond government securities and Treasury bills to include floating‑rate and zero‑coupon bonds, index‑linked bonds, commercial paper, certificates of deposit, corporate debentures, state government loans, SLR and non‑SLR papers from financial institutions and local bodies, mutual fund units and securitised debt. On the NSE‑WDM platform brokers act mainly as order executors, while market participation includes trading members—who may be corporates, bank subsidiaries, satellite dealers and primary dealers meeting a minimum net‑worth threshold (22 crore)—and other participants such as large institutional investors and banks that take settlement responsibility through trading members.

Settlement conventions differ by instrument. Government securities traded on the WDM may be dealt outright or as repos, with flexibility in settlement days that must be specified at the time of trade; non‑government securities are generally traded only on an outright basis. From May 2005, outright secondary market transactions in government securities moved to a T+1 settlement cycle, while repo first legs may settle on T+0 or T+1. Outright transactions in non‑government securities are typically settled up to T+2. All government security trades are reported to the RBI’s SGL (scrip‑wise) system via the NDS or the RBI’s order‑matching platform. The Clearing Corporation of India Limited (CCIL) provides settlement guarantees for government securities, including repos; those trades are settled on a net basis using the DVP‑III model. By contrast, non‑government securities are settled on a gross, delivery‑versus‑payment basis directly between participants.

Indian Corporate Bond Market

The private corporate sector requires substantial long-term finance for expansion, modernization, restructuring and mergers and acquisitions. While equity is a fundamental source of such finance, it is costly and limited; firms therefore need to diversify their funding and rely more on debt. Long-term bank loans are one option, but banks often lack either the capacity or the appetite to hold large numbers of long-dated loans, and doing so would worsen their asset–liability mismatch because banks largely fund themselves with short-term deposits. Banks are, however, prepared to invest in 10–20 year corporate bonds if they have a ready exit route — the ability to sell those bonds when liquidity is required. That exit route is provided by a well-functioning corporate bond market.

A deep corporate debt market lets companies raise long-term capital for long-gestation projects and acquisitions at a lower cost, helping overall economic growth. It complements the banking system by improving asset–liability matching for both borrowers and lenders. Credit ratings on corporate debt increase investor confidence and encourage investors to build diversified portfolios that include both debt and equity. Because institutional investors — mutual funds, banks, insurance companies, retirement and provident funds — seek predictable income streams to meet their obligations, they are the main participants in this market. An active corporate debt market also promotes market discipline and strengthens credit culture among issuers.

Many corporates have turned to external commercial borrowings (ECBs) to access cheaper foreign funds. While ECBs can lower borrowing costs, they raise currency and liquidity risks and can transmit severe external shocks to the domestic economy. This vulnerability underlines the importance of developing the domestic corporate bond market so that a greater share of corporate funding can be sourced at home. A robust domestic market would also provide an alternative financing avenue for small and medium enterprises (SMEs). To access market finance, SMEs typically need a credit rating, and that requirement encourages better accounting, corporate governance and disclosure practices.

The scale of infrastructure investment required in India underscores the need for diverse long-term financing sources. The Committee on Infrastructure Financing (Chairman: Shri Deepak Parekh) estimated large funding needs during the 12th Five Year Plan (2012–17), with a substantial share expected through public–private partnerships. Similarly, the High Powered Expert Group on urban infrastructure (Chairperson: Dr Isher Judge Ahluwalia) projected very large investment requirements between 2012 and 2031. A vibrant corporate bond market would also help develop a market for municipal bonds issued by urban local bodies, widening funding options for both infrastructure and urban services.

Regulatory definitions matter for market design. The SEBI (Issue and Listing of Debt Securities) Regulations, 2008 define “debt securities” broadly to mean non-convertible instruments that acknowledge indebtedness — such as debentures and bonds issued by corporates or statutory bodies — whether or not they create a charge on assets. The regulations exclude government bonds and certain other specified instruments, as well as security receipts and securitized debt.

In India, private sector companies raise debt through debentures that may be convertible (fully or partially) or non-convertible debentures (NCDs). These instruments are governed by the Companies Act. Interest on debentures is typically calculated on an actual 365-day basis, and tax deduction at source (TDS) is applicable. Convertible bonds are often preferred in volatile markets because they offer issuers lower immediate cash outflows while giving investors upside potential; in 2007 India ranked among the most active markets globally for convertible debenture issuance.

Issuers can access debt markets either through public offerings or private placements. Public issues are open to all investors with allotment usually on a pro-rata basis and coupon rates fixed before the offering. Private placements are negotiated directly between issuers and investors, allowing greater flexibility in terms; some privately placed instruments are later listed on stock exchanges. Beyond plain vanilla bonds, corporates have issued hybrid instruments that blend debt and equity features, longer-maturity securities with embedded call and put options, floating rate bonds as well as fixed-rate bonds, reflecting growing sophistication in the private corporate debt market.

Regulatory Framework for Corporate Debt

The Securities and Exchange Board of India (SEBI) regulates the corporate debt market’s primary segment—covering both public issues and private placements by listed companies—and its secondary segment, whether traded over‑the‑counter or on exchanges. The Reserve Bank of India (RBI) is responsible for the market in repo and reverse‑repo transactions involving corporate debt. When such repo transactions are conducted on an exchange, however, the trading and settlement procedures are determined by SEBI.

On 6 June 2008 the Securities and Exchange Board of India (SEBI) notified comprehensive regulations for the public issue and listing of debt securities. These rules begin by preventing market access to any issuer, promoter or person in control who, on the dates of filing the draft or final offer document, is subject to an active SEBI restraint, prohibition or debarment order. Every issuer making a public offer must apply for listing on one or more recognised stock exchanges; where multiple exchanges with nationwide terminals are approached, the issuer must designate one as the “designated stock exchange” for that issue.

The issuer is required to appoint one or more SEBI-registered merchant bankers, with at least one acting as lead merchant banker, and one or more debenture trustees in accordance with Section 117B of the Companies Act, 1956 and the Securities and Exchange Board of India (Debenture Trustees) Regulations, 1993. To prevent circular financing within related entities, debt proceeds cannot be used to provide loans to, or to acquire shares of, persons who are “part of the same group” or “under the same management” as defined under the Monopolies and Restrictive Trade Practices Act, 1969 and the Companies Act, 1956 respectively.

The offer document must contain all material disclosures necessary for an investor to make an informed decision. Specifically, it must include the disclosures required by Schedule II of the Companies Act, 1956, the disclosures prescribed in Schedule I of these SEBI regulations, and any additional information SEBI may require; for this purpose “material” means anything likely to influence an investor’s decision. A draft offer document must be filed with the designated stock exchange through the lead merchant banker and be made publicly available on that exchange’s website for at least seven working days to solicit comments. The draft may also be displayed on the websites of the issuer, the merchant bankers and the stock exchanges where listing is proposed. The lead merchant banker must ensure that comments on the draft are appropriately addressed before filing the final offer document with the Registrar of Companies, and copies of both draft and final documents must be forwarded to SEBI when filed with the exchange. Prior to filing with the Registrar, the lead merchant banker and the debenture trustee must also furnish due diligence certificates in the form prescribed by the regulations.

On or before the opening of the issue, the issuer must place an advertisement in a national daily with wide circulation; the advertisement must be truthful, fair and not misleading. Pricing may be fixed or determined through book-building, in consultation with the lead merchant banker. The issuer may specify a minimum subscription in the offer document; if that minimum is not received, all application monies must be refunded promptly. Public issues may be underwritten by SEBI-registered underwriters, and underwriting arrangements must be disclosed in the offer document.

For secured issues, a trust deed in favour of the debenture trustee must be executed within three months of the issue’s closure. That deed must contain the clauses prescribed under Section 117A of the Companies Act, 1956 and those listed in Schedule IV of the Debenture Trustees Regulations, 1993. Issuers must create a debenture redemption reserve for redemption of debt securities in accordance with the Companies Act, 1956 and any Central Government circulars; if the issuer defaults in payment of interest or redemption, or in creating security as required, any dividend distribution will need the debenture trustee’s approval.

If the issue is secured, the offer document must disclose the proposal to create charge or security and its implications. The issuer must undertake that assets charged are free from encumbrances; where assets are already charged, consent from the prior creditor for a second or pari‑passu charge must be obtained. Issue proceeds must be kept in escrow until documents creating the stated security are executed.

Debt securities must be redeemed as per the offer document. An issuer wishing to roll‑over securities may do so only after a special resolution of holders and after giving at least 21 days’ notice containing the credit rating and the rationale for the roll‑over. Roll‑over is subject to specific conditions: consent by not less than 75% (by value) of holders through a postal ballot; at least one credit rating obtained within six months prior to the redemption date and disclosed in the notice; execution of a fresh trust deed or continuation under an existing deed if permitted; and creation or maintenance of adequate security for the rolled‑over securities. Holders who do not give positive consent must be redeemed.

Listing of publicly issued debt securities on one or more recognised stock exchanges is mandatory under Section 73 of the Companies Act, 1956. Debt securities issued by private placement may also be listed provided they comply with the Companies Act and other applicable laws, obtain at least one SEBI‑registered credit rating, are in dematerialised form, and make the necessary disclosures prescribed by SEBI.

To protect investor interests SEBI has mandated ongoing disclosure and dissemination requirements. Issuers cannot make material modifications to debenture terms—such as coupon, conversion or redemption—without prior approval of the stock exchanges where the securities are listed, and exchanges are required to disseminate such information. Companies, debenture trustees and stock exchanges must promptly inform investors and the public, via press release and their websites, of events such as default in payment of interest or redemption, failure to create a charge, and any revision of the rating assigned to the debentures. Issuers must also publish compliance reports and other information on their and the debenture trustees’ websites and submit these to stock exchanges for wider dissemination.

Finally, debt securities that are listed must be traded, cleared and settled through recognised stock exchanges. Over‑the‑counter trades in debt securities must be reported to a recognised stock exchange with a nationwide trading terminal or to such other platform as SEBI may specify, ensuring transparency and orderly post‑trade processing.

Until the financial reforms of 1991–92, corporate debt issues were a dominant source of capital. The liberalisation that followed, and the rise of equity-market financing, reduced debt’s share in overall capital formation.

Corporate debt comprises bonds and debentures. Between 1998–99 and 2000–01 non‑convertible debentures largely dominated the debt market; by 2001–02 convertible debentures had gained prominence. Historically, around 20–30 per cent of bond issues were structured as bought‑out transactions, but bought‑out deals surged in 2002.

A bought‑out deal is one in which a single investor takes the entire issue. This contrasts with a private placement, where a debt instrument is sold to several investors. Corporates often avoid the private placement route because it requires circulating an information memorandum and keeping the bidding window open for about five days. During that interval market sentiment can shift rapidly—on account of political developments, border tensions, or statements by a central banker—so issuers favour bought‑out deals for their speed and limited disclosure requirements. Nonetheless, the private corporate bond market continues to be sizeable: average annual issuance is close to Rs 70,000 crore, predominantly through private placements.

Corporate debt securities in India trade either over-the-counter (OTC) through bilateral agreements or on stock exchanges via brokers. For listed corporate debt, SEBI requires that negotiated deals be avoided and that trades are executed through the exchanges’ price-and-order matching systems. Consequently, listed corporate debt instruments are handled on the WDM segment of the NSE, and on OTCEI and BSE (since January 9, 1996).

To improve post-trade transparency and reduce settlement risk, SEBI has established a reporting platform and introduced delivery versus payment (DvP) settlement for OTC trades in corporate bonds. Exchanges have been permitted to create dedicated debt segments, and banks and primary dealers authorised by the RBI are allowed to be members of stock exchanges to trade corporate bonds. At the same time, the RBI has relaxed investment norms for banks and primary dealers to facilitate their participation in corporate bond markets.

Several regulatory steps have been taken to deepen investor interest: SEBI has liberalised listing requirements, simplified procedures and disclosure norms, and rationalised FPI regulations to make overseas registration and operating arrangements easier. Banks have been allowed to issue long-term bonds with a minimum seven-year maturity to finance long-horizon lending for infrastructure sub-sectors and affordable housing; these bonds have been exempted from inclusion in the computation of net demand and time liabilities (NDTL) and thus are not subject to CRR/SLR. International financial institutions such as the IFC have been permitted to issue rupee-linked bonds abroad to develop the offshore rupee market and help establish benchmark yields for long-term corporate debt.

Despite these reforms, the secondary corporate debt market remains underdeveloped. Turnover volumes are low: average daily trading is roughly 2,500 crore, and while activity on BSE and OTCEI has been limited, the NSE-WDM segment has shown relatively higher turnover. Trading peaked in 2004–05, declined subsequently, and then rose substantially in 2016–17; nevertheless, the share of debenture trading in total turnover remains small, reflecting the modest overall size of the market.

Several structural constraints impede deeper development and require policy attention. The absence of a reliable, risk-free term structure—i.e., a smooth government securities yield curve—limits the pricing and innovation of corporate instruments; a well-defined sovereign yield curve is essential for efficient corporate bond valuation. Liquidity is thin partly because the market lacks well-capitalised market makers similar to primary dealers in the G-sec market; incentivising market making would improve tradability. Cooperative banks and charitable trusts are allowed to invest in corporate paper only on a case-by-case basis; permitting them to invest in high-quality rated instruments under broad guidelines would widen the investor base.

Large institutional pools such as provident funds hold substantial sums (on the order of 1,00,000 crore) but have traditionally favoured low-risk government and public-sector paper. Careful measures to ensure adequate return and safety could encourage provident and pension funds, as well as insurance companies, to allocate more to private corporate bonds. The prevalence of private placements has limited open-market trading, concentrating issuance among a narrow set of institutional buy-and-hold investors and making it difficult for lower-rated borrowers to access market funding. Reviving the secondary market therefore requires expanding the number and types of participants and instruments.

Banks continue to prefer direct lending over subscribing to corporate bond issues, constrained by credit concerns and sectoral exposure limits; banks also rarely retail the corporate bonds they hold. Stamp duty arrangements are uneven and add to issuance costs—the duty on debentures has been cited at 0.375 per cent ad valorem while promissory notes attract 0.05 per cent, and rates vary across states for mortgage and assignment. Lowering and harmonising stamp duties would reduce issuance costs; the R. H. Patil Committee, for example, recommended a maximum ad valorem stamp duty of 0.25 per cent with a capped amount for a seven-year instrument. Underwriting capacity is thin, especially for lower-rated paper; global liquidity tightening since 2008 and weak investor demand have reduced the pool of underwriters. Finally, investor awareness about rated debt instruments versus unrated fixed deposits remains limited, and markets for credit derivatives such as CDS and for repo transactions in corporate bonds have not yet taken off.

A liquid, well-functioning corporate bond market would support industrial growth by broadening funding sources beyond bank credit, diversifying financial-system risk, and enabling firms—both public and private—to borrow longer in local currency, thereby reducing currency mismatch on balance sheets. It would also give institutional investors access to long-term, quality assets to match liabilities and would provide small and medium enterprises with better access to long-term finance. Building a smooth government yield curve, encouraging market makers, widening and simplifying investor eligibility, rationalising costs such as stamp duty, strengthening underwriting capacity, and developing ancillary markets (CDS and repos) are key steps to unlock this large growth potential.

Policy measures since the mid-2000s have steadily opened and deepened India’s corporate debt market by removing regulatory constraints, improving market infrastructure, and introducing new instruments and safeguards. One of the earliest steps was the removal of ceilings on interest rates and on bank investments in corporate debt, while making conversion optional at the investor’s choice. Banks were permitted to classify non‑SLR bonds issued by infrastructure companies with a minimum residual maturity of seven years under the Held to Maturity (HTM) category, provisioning norms for infrastructure loans were relaxed, and banks were given limited flexibility to invest in unrated infrastructure bonds within an overall 10 per cent ceiling.

Secondary‑market access was strengthened by allowing listing of privately placed debt, so that a company’s debt can be listed even if its equity is not. Securitised debt paper also began to trade actively in the secondary market, attracting considerable interest. To encourage a more efficient primary market, the Securities and Exchange Board of India (SEBI) in December 2007 simplified issuance norms for corporate bonds: issuers of public or rights issues were required to obtain a rating from only one credit rating agency instead of two; bonds below investment grade were permitted to be offered to the public, placing the onus on investors to accept the higher risk; and structural restrictions on features such as maturity, put/call options and conversion were removed to give issuers greater flexibility in designing debt instruments.

Market infrastructure improvements followed. The BSE and NSE launched trading and reporting platforms in January and March 2007 respectively, and in September 2007 the Fixed Income Money Market and Derivatives Association of India (FIMMDA) started a corporate bond trade reporting platform. These platforms made trade matching more order‑driven while retaining key over‑the‑counter features, and they began disseminating comprehensive bond data—issuer name, maturity, coupon, last traded price and amount, yields, traded volumes and ratings—along with clearing and settlement services. FIMMDA, a voluntary market body of scheduled banks, public financial institutions, primary dealers and insurers incorporated in 1998, has also promoted market development by introducing benchmark rates, releasing valuation rates for government securities and promoting best practices that enhance transparency and efficiency.

Operational harmonisation followed: SEBI aligned the shut period for corporate bonds with that for government securities and, in June 2011, directed exchanges to eliminate the shut period for interest payments and part‑redemptions. SEBI also required issuers of prospective privately placed corporate bonds to set a record date no more than 15 days prior to book closure. In September 2011 SEBI introduced a framework for issuing structured products—debt instruments with returns linked to equities or other assets—mandating additional disclosures, scenario analyses, disclosure of embedded commissions, and mandatory third‑party valuation by a credit rating agency. Only issuers with a minimum net worth of Rs. 100 crore are eligible to issue these products, and the minimum subscription ticket for retail participation was set to protect investors.

To improve liquidity and trading convenience, tradable lot sizes for corporate bonds were reduced to Rs. 1 lakh and all new issues were required to specify an actual day‑count convention for interest calculations. The day‑count convention determines how accrued interest between coupon dates is calculated (for example, using 360 or 365 days in a year); this standardisation reduces disputes and valuation uncertainty. The Reserve Bank of India (RBI) allowed issuers to use Electronic Clearing Services (ECS), RTGS or NEFT for interest and redemption payments, streamlining operational processes.

Regulatory consolidation continued with draft regulations on issue and listing of debt securities issued in January 2008 and notified on June 6, 2008. These regulations rationalised disclosure requirements, enhanced merchant bankers’ due‑diligence obligations, mandated listing of previously unlisted private placements, provided for reissuances of corporate debt, and proposed streamlined listing norms for debt of listed issuers. The Finance Minister also proposed exempting corporate debt instruments held in demat form and listed on recognised exchanges from tax deducted at source (TDS). Exposure norms for Primary Dealers were relaxed to enable them to deepen market-making and distribution in the corporate bond market.

Risk‑management instruments were introduced with appropriate safeguards. Credit Default Swaps (CDS) on corporate bonds were permitted from December 1, 2011 to facilitate hedging of credit risk and to encourage long‑term investment. The CDS framework included restrictions to prevent naked positions, mandated position limits for market makers, compulsory reporting of transactions to the CCIL trade repository, publication of a CDS curve for valuation, and standardisation of contracts. Finally, revised guidelines for securitisation of standard assets were issued to develop the bond market and offer investors a safer product; these guidelines seek to align the originator’s interests with those of investors and incorporate suitable investor protections.

FPI Corporate Debt Regulations

In February 2015 the Reserve Bank of India (RBI) tightened entry conditions for Foreign Portfolio Investors (FPIs) investing in corporate debt. Going forward, all investments made under the USD 51 billion corporate debt limit—this includes limits freed up when existing FPI holdings are sold or redeemed—must be in corporate bonds with a minimum residual maturity of three years (residual maturity meaning the time remaining until the bond matures). FPIs were also prohibited from investing in liquid and money‑market mutual fund schemes. There is no lock‑in requirement, however; FPIs remain free to sell the securities they hold, including bonds that today have less than three years’ residual maturity, to domestic investors.

These regulatory adjustments came against a backdrop of increasing recourse by corporates to the bond market and a declining dependence on bank credit. The share of corporate bonds in total non‑government fixed income outstanding rose from 17% in 2011–12 to about 20% in 2015–16, while the share of bank credit moved down from roughly 73% to 65% over the same period. Within the bond market, private placements have outpaced public issues: issuers and investors have favoured private placements for their operational ease, lower disclosure requirements and reduced costs. Enhancing the attractiveness of public offerings would help draw retail participation and could ease the liquidity constraints that afflict the secondary market.

Reporting and settlement architecture for corporate bonds has also evolved. Stock exchanges—BSE, NSE and MSEI—maintain the primary reporting platforms for corporate bond trades. Reporting of secondary market transactions was discontinued at FIMMDA from April 1, 2014. Although MSEI began reporting in July 2013, reported volumes there have been insignificant, and the NSE remains the largest platform for over‑the‑counter corporate bond reporting.

Since December 1, 2009 it has been mandatory that trades in corporate bonds among mutual funds, FPIs and their sub‑accounts, venture capital funds, foreign venture capital investors, portfolio managers and other RBI‑specified regulated entities be cleared and settled through exchange clearing corporations—namely the National Securities Clearing Corporation Limited (NSCCL), the Indian Clearing Corporation Limited (ICCL) or the MSEI Clearing Corporation Limited (MSEI CCL). To address settlement shortages, exchanges and clearing corporations are permitted to effect a financial close‑out: the close‑out price is the highest price on the trade date (which becomes the trade price) plus a 1% mark‑up. In addition, exchanges and clearing corporations were instructed to introduce a uniform auction mechanism to handle settlement shortages by March 31, 2017.

When banks provide partial credit enhancement (PCE) to corporate bonds during the life of the bond, a few regulatory conditions must be met to ensure transparency and proper capital treatment. First, the bond must carry ratings from at least two external credit rating agencies at all times. Both the initial and any subsequent rating reports must disclose two separate measures: the issuer’s standalone credit rating (that is, the rating without the effect of PCE) and the enhanced credit rating that reflects the impact of the PCE. For the purpose of calculating the capital charge on the balance sheet of the PCE provider, the regulator requires taking the lower of the two standalone ratings and using the corresponding enhanced rating issued by that same agency for capital computation. If, during the life of the bond, the reassessed standalone rating improves relative to the rating at issuance, the capital requirement may be recomputed on the basis of the reassessed standalone rating and the reassessed enhanced rating, without being constrained by the usual capital floor or by limits driven by differences in notches.

Separately, as announced in the Union Budget 2016–17, the list of instruments in which Foreign Portfolio Investors (FPIs) may invest under the corporate bond route was expanded. FPIs were allowed to participate in primary issues of unlisted non-convertible debentures/bonds issued by public companies in dematerialised (demat) form, subject to the condition that the issuing company does not use the proceeds for real estate activities, land acquisition, investments in the capital market, or on‑lending to other entities; custodian banks of FPIs must ensure compliance with this restriction based on an undertaking from the issuer. FPIs were also permitted to invest in securitised debt instruments — specifically, certificates or instruments issued by special purpose vehicles (SPVs) set up to securitise assets originated by banks, financial institutions or NBFCs, and any securities issued and listed in accordance with the SEBI Regulations on Public Offer and Listing of Securitised Debt Instruments, 2008.

Repo Framework for Corporate Debt

The Reserve Bank’s framework for repos in corporate debt securities, set out in the Repo in Corporate Debt Securities (Reserve Bank) Directions, 2015, defines the scope and procedure for these transactions and specifies eligible collateral, participants, settlement mechanics and prudential requirements.

Under these Directions, a “corporate debt security” covers non‑convertible debt instruments—such as debentures and bonds—issued by companies or bodies corporate constituted under central or state law. It excludes government securities and certain specified instruments such as security receipts and securitised debt instruments. The term “security receipts” is used as defined in clause (zg) of Section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, while “securitised debt instrument” follows the description in sub‑clause (i) of clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956.

Eligible collateral for repos in corporate debt securities includes listed corporate bonds of original maturity greater than one year that are rated AA or above by SEBI‑registered rating agencies and held in the repo seller’s demat security account. Shorter‑term instruments—commercial papers, certificates of deposit and non‑convertible debentures with original maturity up to one year—are eligible if they carry an A2 rating or better from SEBI‑registered agencies. In addition, bonds issued by multilateral financial institutions (for example, World Bank Group entities, ADB, AfDB) that are rated AA or above by SEBI‑registered or internationally recognised rating agencies are eligible, and the Reserve Bank may notify other eligible issuers from time to time.

A wide range of market participants may undertake these repo transactions. These include scheduled commercial banks (excluding regional rural banks and local area banks), Reserve Bank‑authorised primary dealers, NBFCs registered with the Reserve Bank (excluding government companies as defined in the Companies Act, 2013), All‑India financial institutions such as EXIM Bank, NABARD, NHB and SIDBI, India Infrastructure Finance Company Limited, and scheduled urban cooperative banks subject to RBI conditions. Other regulated entities—mutual funds, housing finance companies and insurance companies—may participate subject to approval by their respective regulators. The Reserve Bank may also permit other entities on a case‑by‑case basis.

Tenors for these repos range from a minimum of one day to a maximum of one year, and transactions are to be executed over the counter. All trades must be reported on the reporting platform of Clearcorp Dealing Systems (India) Ltd. (CDSIL) within 15 minutes of execution.

Settlement of repo trades is on a delivery‑versus‑payment (DvP) I gross basis, with settlement cycles permitted on T+0, T+1 or T+2 as applicable. Clearing and settlement are routed through the recognised clearing houses—NSCCL (for NSE), ICCL (for BSE) and CCL (for MCX‑SX)—under their prescribed norms. On the repo’s reversal date, these clearing houses calculate parties’ obligations and facilitate settlement on the same DvP‑I basis. Importantly, the security acquired under a repo may not be sold by the repo buyer (the lender of funds) during the term of the repo.

Collateral protection is reinforced through rating‑based minimum haircuts prescribed by the Reserve Bank; participants may apply higher haircuts depending on the repo term and remargining frequency. The present minimum haircuts specified are, as provided, 7.5% for the highest rated category, 8.5% for the next, and 10% for the lower AA category. For valuation of the corporate debt security when determining market value, participants may refer to credit spreads published by FIMMDA.

Participants must comply with capital adequacy norms and any specific instructions issued by the Reserve Bank or other regulators for repo transactions in corporate debt securities. Details of securities lent or acquired under repo and reverse repo arrangements should be disclosed in the “Notes on Accounts” to the balance sheet. For regulatory accounting, amounts borrowed by a bank through such repos are treated as part of its demand and time liabilities and, therefore, attract CRR/SLR; these borrowings are reckoned as liabilities for reserve requirement purposes and may be netted against banking system liabilities in accordance with the explanation to Section 42(1) of the Reserve Bank of India Act, 1934, while remaining subject to prudential inter‑bank liability limits prescribed by the relevant regulatory departments.

In 2017, several measures were announced to deepen the corporate bond market: the aggregate limit on Partial Credit Enhancement (PCE) provided by banks was increased to 50 per cent, brokers were permitted to participate in corporate bond repos, and consolidation and re‑issuance of corporate bonds were allowed. These steps contributed to higher turnover in the secondary corporate bond market.

Despite regulatory efforts, the corporate debt market remains a relatively small segment of India’s broader debt market. Greater investor education is necessary—particularly to build a retail investor base that understands the benefits of rated debt instruments and the availability of tools such as interest rate futures for hedging fixed‑income exposures. Sustainable development of the corporate bond market will require improved liquidity through a larger set of participants, active market‑making supported by new institutions, a smooth government securities yield curve, and innovation in product design.

PSU Bond Market Evolution

Public sector undertaking (PSU) bonds are medium- to long-term debt instruments issued by state-owned enterprises to meet working capital and capital expenditure needs. The market for these bonds expanded from the late 1980s, after the central government curtailed direct budgetary funding to PSUs and firms began tapping the capital markets instead. Over time the PSU bond market has grown substantially, dominated by infrastructure-related issuers such as power utilities and rail companies. Most issues feature bullet redemption, with some carrying embedded put or call options; maturities are commonly in the medium term, generally between five and ten years, and issue sizes vary widely.

A large share of PSU bonds are privately placed with banks and institutional investors. Private placements are not required to carry credit ratings, whereas public issues must be rated by one or more of the recognised Indian rating agencies. Defaults on PSU bonds have historically been rare, and PSUs are often perceived as quasi-sovereign borrowers. In many cases, state governments provide explicit guarantees for interest and principal payments on bonds issued by state-owned enterprises, particularly to support financing of long-gestation infrastructure projects.

PSUs may issue either taxable bonds or tax-free bonds. Tax-free bonds carry interest that is exempt from the investor’s taxable income and are issued only with prior approval from the Central Board of Direct Taxes under the Income Tax Act. Both central and state-level PSUs have used such exemptions; examples include large central utilities as well as State Electricity Boards and State Financial Corporations. Bonds issued by some State Financial Corporations are eligible for statutory liquidity ratio (SLR) investment by cooperative banks and certain non-banking finance companies. Interest on these instruments is typically computed on an actual/365-day basis, and tax deduction at source (TDS) applies where relevant.

Regulatory and market conditions have changed markedly since the early 1990s. Before the economic reforms of 1991, interest rate ceilings applied to PSU bonds and banks faced quantitative limits on investment in them. From August 1991 the ceiling on interest rates was removed, allowing yields on some issues to rise sharply; ceilings on tax-free bond coupons were subsequently adjusted. Banks’ quantitative ceilings on investment in PSU bonds were also abolished, enabling larger and freer participation. Provident and pension funds’ allocation norms were loosened as well: initial limits on investment as a proportion of incremental deposits were raised, allowing these funds to increase their exposure to PSU paper.

The government issued revised guidelines for PSU bond issues in October 1993. Under those guidelines, tax-free bonds were required to have a minimum maturity (seven years), while PSUs retained freedom to set maturities for taxable bonds. Public issues are subject to guidelines issued by the Securities and Exchange Board of India. PSUs are permitted to use a variety of debt instruments, including floating-rate notes and deep-discount bonds, and all new issues are required to be listed on a stock exchange.

Institutional investors dominate the investor base for PSU bonds: banks, insurance companies, non-banking finance companies, provident funds, mutual funds, financial institutions and, to a lesser extent, retail investors. Over the last few decades there has been a shift in issuance patterns. Taxable bonds became more popular after interest rate ceilings were removed in the early 1990s, and many PSUs moved away from public offers to private placements. From the late 1990s through the 2000s, PSU issuers frequently preferred private placements because they are quicker, less costly and better suited to a secondary market that was relatively illiquid.

Trading and Liquidity of PSU Bonds

PSU bonds are typically issued and traded either as promissory notes or as stock certificates. Promissory notes are transferred by endorsement and delivery, while stock certificates require a duly executed transfer deed and are subject to stamp duty unless an exemption applies. Clearing and settlement today take place in registered form, and where registration does not require a transfer deed—such as for dematerialized securities—the instruments are exempt from stamp duty. Nonetheless, contract notes for PSU bond transactions attract a stamp duty of 0.01 per cent.

Repos are permitted only when PSU bonds are held in dematerialized form. In a move to encourage secondary-market activity, the Union Budget for 1999–2000 abolished stamp duty on transfer of dematerialized instruments. PSU bonds are actively quoted on the WDM segment of the NSE and on the debt (F) segment of the BSE.

Liquidity in the PSU bond market is limited, although it has been observed to be higher than that of government‑guaranteed issues and some state government securities. Most trades are intermediated through brokers, and both brokerage charges and bid–offer spreads tend to be lower than those seen for state government and government‑guaranteed bonds. Trading conventions differ by investor type: institutional investors transact in large multiples of rupees, while smaller trusts and retail investors trade in comparatively smaller lots. Average daily volumes amount to several crores, with typical transaction sizes also in the crore range.

In the early 1990s PSU bonds offered relatively attractive yields, drawing investments from cash-rich PSUs, mutual funds, and commercial banks and making the segment one of the most active at that time. Tax-free bonds were particularly popular, and market participants employed “tax‑stripping repo” strategies to exploit tax differentials. The market was, however, misused during the Securities Scam of 1992, when funds were diverted from the banking system. Activity revived from 1993 after greater deregulation of PSU bond issues, which encouraged renewed institutional participation.

Since 2000–01 the absolute volume traded in PSU bonds has risen, but the segment’s share of overall market turnover has declined. Activity remains constrained because a substantial portion of PSU issuance is done through private placements, reducing the floating stock available for secondary trading. Retail investor participation is low and the market lacks widely accepted standard norms and practices.

To improve transparency and liquidity, the market would benefit from the introduction of standard trading norms and market practices. Establishing a primary dealer network similar to that used in the government securities market could also strengthen secondary‑market trading and enhance liquidity, thereby supporting the broader development of the PSU bond market.

Evolution of India's Government Securities Market

The government needs enormous sums to fulfil its core responsibilities: providing public services such as law and order, justice and national defence; conducting central banking and monetary regulation; regulating economic activity in the private sector; and creating and maintaining physical infrastructure.

These activities are funded mainly from tax receipts and income from government-owned assets. When these resources are insufficient, the government borrows heavily from banks, financial institutions and the public to meet expenditures that exceed revenues.

A principal channel for such borrowing is the government securities market (GSM). By issuing short‑term and long‑term securities the state raises required funds; these instruments carry negligible credit risk because the government guarantees interest payments and repayment of principal, which is why they are commonly called gilt‑edged securities. The GSM is typically the largest financial market in an economy and acts as the benchmark for other markets, with its yields helping to set interest-rate norms across the system.

The Government Securities Market (GSM) is the central pillar of the debt market. It supplies the government with both short‑term cash for day‑to‑day needs and long‑term funds for financing deficits, while simultaneously providing the reference yields that serve as benchmarks for pricing corporate debt across different maturities. A well‑developed GSM is therefore a precondition for a vibrant corporate bond market; it also helps integrate various segments of the domestic financial system and fosters linkages between domestic and external capital markets.

Beyond financing, government securities are an important tool for macroeconomic management. They enable the government to implement fiscal policy and form a reliable transmission channel for monetary policy. Two key monetary instruments—open market operations (OMOs), which adjust liquidity by buying or selling government securities, and the Statutory Liquidity Ratio (SLR), which requires banks to hold a prescribed share of their assets in safe instruments—operate closely through this market.

Government securities are regarded as the highest‑quality collateral, offering the greatest security of capital. Their returns depend on coupon rates and time to maturity, and they are actively traded across short and long horizons according to investors’ liquidity and horizon preferences. Investors and dealers also shift positions between short‑dated and long‑dated issues by exploiting differences in redemption yields, which is a central mechanism for managing duration and interest‑rate risk.

Government securities are issued by the central and state governments and by semi-government bodies, including local authorities such as municipal corporations. The market’s largest participants are nationalized banks, which buy these securities largely to meet statutory reserve requirements. Other active investors include insurance companies, state governments, provident funds, corporates, non-banking finance companies, primary dealers, financial institutions and, to a limited extent, foreign institutional investors and non-resident Indians.

Investors in the government securities market can be viewed in three broad segments. The wholesale segment comprises institutional players — banks, financial institutions, insurance companies, primary dealers and mutual funds — that trade in large volumes. A middle segment includes corporates, provident funds, trusts, NBFCs and small cooperative banks, typically carrying average liquidity in the range of several crores. The retail segment consists of individuals and other non-institutional investors who participate less frequently and in smaller sizes.

Insurance companies are among the largest holders of government paper because regulatory norms set by the Insurance Regulatory and Development Authority of India require a substantial portion of insurance assets to be invested in government securities: 20 per cent for general insurance and pension business and 25 per cent for life insurance business. Most trading in government securities occurs in large standard lots — around Rs 1 crore — and about 99 per cent of transactions are routed through the Subsidiary General Ledger (SGL), the depository-style account maintained by the Reserve Bank of India. Ordinary individuals cannot open SGL accounts directly; retail investors who wish to transact in large volumes must use SGL-II accounts through a bank or a primary dealer, subject to minimum balance and trading activity requirements.

There are two principal types of government securities: treasury bills and government dated securities. Treasury bills are short-term instruments, while government dated securities carry periodic coupons and are issued with varying maturities. The RBI sometimes converts maturing treasury bills into longer-term bonds, effectively rolling over the government’s debt.

Trading has traditionally been conducted by telephone via brokers, with deals reported on the Negotiated Dealing System (NDS) and subsequently cleared and settled through the Clearing Corporation of India Limited (CCIL). The RBI has proposed moving to a screen-based, order-matching trading platform for government securities. Such a system would allow market participants to buy and sell bonds through an electronic order book, improving price discovery in much the same way as equity markets.

The Reserve Bank of India, set up in 1935, began issuing government securities on behalf of the state and sold them to institutions and the public. In the 1930s the government followed a cheap‑money policy, at times issuing securities with interest rates as low as 2.5 per cent. After independence, when the RBI was nationalised, it continued to manage monetary policy and the structure of interest rates, and—on government instructions—framed programmes for borrowing through government securities.

During the 1950s the government’s borrowing programme was steadily increased to finance development across sectors, and interest rates on securities were raised to help mobilise resources. To support larger borrowings and to foster a genuine market in government paper, the RBI conducted open market operations and appointed reputable brokers and jobbers to execute these operations. Market participants included commercial banks, life and general insurance companies, charitable and religious trusts, provident funds and some retail investors. Trading in government securities became a daily activity, whether for long‑term investment or for switching between long and short maturities. Until the 1950s, individuals held a relatively larger share of government paper than institutional investors.

From the 1960s through the late 1980s and into the early 1990s the government securities market became largely dormant. The government borrowed at pre‑announced coupon rates, with banks as the dominant investors, and coupon yields remained negative in real terms until about the mid‑1980s. The 1980s saw an expansion in both long‑ and short‑term debt—especially short‑term—driven by automatic accommodation through the issue of ad hoc Treasury bills. Over this period the RBI had limited control over key debt‑management dimensions such as the volume and maturity profile of securities and the term structure of interest rates; market loans were heavily skewed toward very long maturities (more than 15 years). The lack of a firm limit on automatic monetisation of central government budget deficits, together with relatively low coupon rates, meant internal debt management remained passive. This combination of automatic monetisation and subdued yields kept the market shallow and prevented it from becoming deep and vibrant.

Recognising the importance of a liquid, well‑functioning government securities market for effective internal debt management, policy measures were announced in mid‑1991 to initiate reforms and revive the market.

Reforms in the government securities market were designed to strengthen market functioning across several interlinked dimensions: central-bank autonomy, institutional capacity, market structure, legal clarity, technology, and transparency. A principal objective was to increase the operational autonomy of the Reserve Bank of India so it could manage public debt and implement monetary policy more effectively, alongside improvements to the institutional infrastructure that supports market activity.

To deepen and broaden the market, reforms introduced a wider range of instruments and refined market micro‑structure. Changes included the adoption of both yield‑based and price‑based auctions, use of tap issues (additional issuances against an existing security), pre‑announcing notified amounts, re‑issuing dated securities, publishing a calendar of Treasury bill auctions, and providing liquidity support to primary dealers—measures intended to enhance predictability, liquidity and price discovery.

Strengthening the legal and regulatory framework was another core aim. This involved amending the Securities Contracts (Regulation) Act and proposing a dedicated Government Securities Act to create a clearer statutory basis for transactions and participant rights across the market. Complementing legal reform were technology upgrades: computerization of the RBI’s public debt offices (PDOs) and the introduction of the real‑time gross settlement (RTGS) system to speed up and secure payments and settlements.

Finally, reforms sought greater transparency and standardization by introducing uniform market codes and accounting norms. Together, these measures aimed to build a more efficient, resilient and transparent government securities market capable of supporting broader participation and sound public debt management.

In the 1990s the Reserve Bank of India (RBI) carried out a sustained programme of reforms to make the government securities market more efficient, liquid and transparent, while also securing government borrowing in a cost‑effective manner. A market‑based auction system for medium‑ and long‑term securities was introduced on June 3, 1992, and a range of new instruments — including conversion of auction treasury bills into term securities, zero coupon bonds, capital‑indexed bonds, tap stocks and partly‑paid stock — were launched to diversify supply and investor choice. Shorter‑dated instruments were also standardised: 364‑day treasury bill auctions began on April 28, 1992, and 91‑day auctions from January 8, 1993 (14‑day bills were experimented with in 1997 but discontinued in 2001). Repurchase (repo) auctions in dated government securities were introduced from December 1992.

To foster market making and intermediation, the Securities Trading Corporation of India (STCI) was established in May 1994 and began operations the following month. A key reform in 1994–95 was the delinking of the budget deficit from automatic monetisation: the RBI first limited and then discontinued the creation of ad hoc treasury bills, reducing reliance on monetary financing of the deficit. The National Stock Exchange (NSE) started trading in government securities from June 30, 1994, and from September 1, 1994 the RBI began publicly disclosing transactions routed through the Subsidiary General Ledger (SGL) to enhance transparency.

Settlement and risk management were strengthened through the introduction of a delivery‑versus‑payment (DVP) system on July 17, 1995, which synchronised transfer of securities with cash payments and reduced settlement risk and fund diversion. Continuous improvements in electronic connectivity followed: by 1999 the RBI’s SGL was networked with the National Securities Depository Limited (NSDL), enabling electronic settlement for investors with depository accounts. At the same time the RBI tightened trade discipline — mandating that every trade be settled with both funds and delivery, prohibiting netting, and making trade reporting compulsory for negotiated deals in the Wholesale Debt Market segment of the NSE.

The RBI and the government also took steps to broaden and deepen the investor base. In May 1995, guidelines required non‑government provident, superannuation and gratuity funds to earmark up to 25 per cent of their corpus for investment in central government securities. Primary dealers (PDs) and satellite dealers were appointed to act as market makers, and foreign institutional investors (FIIs) were allowed to invest in dated government securities subject to limits (a 30 per cent ceiling on debt investments was later removed in October 2008; a separate quantitative limit of USD 5 billion for FII investment in government securities was also set). Retail access to the primary market was encouraged by reserving up to 5 per cent of allotments for non‑competitive bids, and the government permitted commercial banks to distribute government securities to non‑bank clients.

Operational innovations continued at the turn of the century. A formal Ways and Means Advances (WMA) scheme came into effect on April 1, 1997 to manage temporary mismatches between government receipts and payments, replacing the earlier practice of automatic monetisation. To reduce market disruption from large borrowing programmes the RBI accepted private placement of government stock and released these into the market when interest rate conditions were favourable; after a seven‑year gap a 20‑year government security was issued in 1998–99. The uniform‑price auction format, initially used for 91‑day treasury bills, was extended experimentally to dated securities and floating‑rate bonds in 2001.

To address occasional gridlocks in DVP settlement caused by intraday fund shortfalls, the RBI introduced a special intra‑day fund facility from October 3, 2000, allowing SGL holders automatic invocation of undrawn refinance or liquidity support to complete settlements. Further market‑structure reforms in 2001–02 focused on enhancing liquidity and creating benchmarks: the RBI pursued consolidation by re‑issuing existing loans to improve fungibility, lengthened the maturity profile of supply (including bonds of 25 years), and sought to concentrate issuance in key maturities to develop benchmarks. Two major infrastructure initiatives — an electronic Negotiated Dealing System (NDS) and the Clearing Corporation of India Limited (CCIL) — were operationalised in February 2002 to provide a robust platform for trading, clearing and settlement, including repos.

Legislative and systems work also progressed. The RBI proposed replacing the Public Debt Act, 1944 with a modern Government Securities Act to simplify transactions, permit lien‑marking/pledging and facilitate electronic dematerialised transfers; the Parliament later passed the Government Securities Act, 2006. The RBI promoted electronic payments and settlement by rolling out Electronic Funds Transfer and the Real Time Gross Settlement (RTGS) system, and prepared a roadmap for separate trading of the principal and interest components (STRIPS), inviting market feedback. An indicative advance calendar for dated security issuances was published in March 2002 to improve transparency in primary borrowings.

From 2002 onwards the market moved rapidly to screen‑based, anonymous order‑driven trading. A half‑yearly issuance calendar was published and exchanges began screen‑based trading in government securities in January 2003. CSGL (constituent SGL) account holders were permitted to enter into repos from March 2003, and the RBI issued uniform accounting guidelines for repo/reverse‑repo transactions. Under a securities lending scheme the CCIL was authorised to borrow required government securities from selected members to facilitate settlement. The practice of re‑issuing securities continued to support consolidation; in 2002–03 nineteen out of thirty‑one securities were reissues, accounting for nearly 59 per cent of dated issuance that year.

Settlement and trading efficiencies were further enhanced over the next few years. Retail trading at select exchanges began in 2003, anonymous screen‑based order‑matching was incorporated on the NDS from August 11, 2004, and the RBI permitted sale of securities allotted in the primary market on the day of allotment to enable same‑day sale, settlement and transfer. To reduce market risk and facilitate repo rollovers, participants were allowed from April 2, 2004 to sell securities against confirmed purchase contracts provided those purchases were guaranteed by the CCIL or backed by the RBI; this coincided with a shift to DVP‑III net settlement. In April 2005 the RBI widened repo access to listed corporates, urban cooperative banks and other eligible entities, subject to safeguards, and from May 2005 all outright secondary market trades in government securities settled on a T+1 basis.

The NDS‑OM trading module, launched on August 1, 2005, gave market participants an advanced electronic trading platform. Regulatory changes in 2006 allowed banks that met eligibility criteria to run primary dealer operations departmentally, permitted intra‑day short sales covered by purchases within the same trading day (later extended to five trading days), and authorised NDS members to undertake “when‑issued” transactions in notified but not yet issued securities. The Government Securities Act, 2006 provided the legal underpinning for many of these market practices.

To modernise settlement arrangements for non‑bank participants, the RBI introduced a multimodal settlement (MMS) system in June 2008. Under MMS the securities leg for non‑bank and non‑PD NDS members continued to be settled in their SGL accounts with the RBI, while the funds leg was settled through designated commercial banks appointed as Designated Settlement Banks (DSBs) by the CCIL; HDFC Bank, Axis Bank and Citibank were named as DSBs. From June 30, 2008, secondary market transactions in government securities by mutual funds have been settled only through these DSBs. Collectively, these measures over more than a decade transformed India’s government securities market into a more transparent, electronically settled and liquid market capable of supporting broader development of the domestic debt market.

STRIPS: Structure and Market Framework

STRIPS (Separate Trading of Registered Interest and Principal of Securities) is the process of breaking a conventional coupon-bearing government security into a set of zero-coupon instruments that can be traded separately. A typical 10‑year coupon bond with semi‑annual coupons, for example, can be converted into one principal strip (the redemption at maturity) and a series of coupon strips (each periodic interest payment), with each of these stripped securities trading independently at market‑determined yields. Thus the periodic cash flows that once accrued to a single bond become distinct zero‑coupon instruments, allowing investors to buy or sell particular cash flows without taking the entire original security.

Creating strips broadens and deepens the debt market. By converting one long‑dated instrument into many securities of different maturities, STRIPS promote continuous price discovery and help establish a market‑determined zero‑coupon yield curve. The resulting range of maturities meets diverse investor needs and risk profiles. Because STRIPS are discount instruments with no interim interest payments, they eliminate reinvestment risk for intermediate cash flows—a feature attractive to retail and non‑institutional investors. Issuers also benefit: they can raise long‑term funding and then meet short‑term demand by stripping coupons into shorter‑dated instruments, increasing the supply and tradability of paper in the secondary market. Banks can use STRIPS against the securities they hold, which helps them manage asset–liability mismatches and enhances flexibility in collateralised transactions.

A number of market and regulatory reforms over the 1990s and 2000s—improvements in auctioning, introduction of new instruments, development of primary dealer networks, dematerialisation and electronic trading and settlement, and expanded repo and derivative markets—created the infrastructure and scale necessary for STRIPS to succeed. The Reserve Bank of India’s efforts to re‑issue existing loans and to align coupon dates across securities have helped create large benchmark issues, further supporting a viable STRIPS market. The legislative framework was also updated: provisions to permit stripping were incorporated into the new Government Securities Act, which supplanted the older Public Debt Act, 1944.

Operational steps to foster an active STRIPS market included consolidation of outstanding securities (announced in April 2005) so that fewer securities with larger issue sizes would trade more actively, making it easier to float and trade coupon components. Reflecting these reforms, the RBI issued a new dated security—6.01% Government Stock 2028—on 7 August 2003 with coupon dates aligned to support standardisation; primary dealers meeting prescribed financial criteria were authorised to carry out stripping and reconstruction, and the Public Debt Office of the RBI was designated to maintain a registry of stripped bonds.

The RBI’s operational guidelines for STRIPS, effective from 1 April 2010, set out practical conditions and processes. Any holder—individual or institutional—may apply to strip or reconstitute eligible government securities, but stripping/reconstitution is permitted only for securities held in electronic form in SGL/CSGL accounts at the Public Debt Office, so participants must open and maintain the appropriate demat/Gilt accounts. The stripping and reconstruction process is executed at the Public Debt Office via PDO‑NDS as a straight‑through electronic operation without manual intervention. Requests must be placed through an authorised entity; initially, primary dealers were eligible to act as authorisers. Holders may opt to strip or reconstitute at any time from issuance up to maturity. All dated government securities with coupon dates falling on 2 January and 2 July (regardless of maturity year) were specified as eligible for stripping/reconstitution. The minimum transaction size for stripping or reconstitution is Rs. 1 crore (face value) and in multiples thereof.

STRIPS retain the essential characteristics of government securities: they are eligible for SLR holdings and may be used in market repos and in LAF operations, subject to appropriate haircuts. As zero‑coupon instruments they trade at a discount and redeem at par. Initially, STRIPS were permitted to trade only over the counter, with trades reported on the NDS for clearing and settlement through CCIL, ensuring integration with the market’s electronic settlement architecture.

Retail Access to Government Securities

A broad and active retail segment is essential for a deep and resilient government securities market, yet retail participation in India has historically lagged. Although individuals may purchase government securities directly from the RBI’s Public Debt Office at auctions, most retail investors remain unfamiliar with market mechanics and often regard government securities as instruments primarily for institutions. This perception, coupled with limited distribution channels, hindered the natural development of a retail market and prompted the RBI to introduce several measures to widen participation.

Commercial banks were permitted to buy and sell government securities freely at market prices and to offer these securities to non-bank clients without restrictions on the timing between purchase and sale. To encourage genuine secondary-market trading, the RBI exempted interest income on government securities from tax deduction at source (TDS) from June 1997, making these instruments particularly attractive to investors sensitive to TDS, such as senior citizens.

The primary dealer and satellite dealer systems were created partly to expand distribution and foster voluntary retail holdings. These intermediaries have been given liquidity support and repo facilities to enable them to develop wider retail networks and to act as market makers. At the same time, steps to dematerialize holdings—by allowing the National Securities Depository Limited (NSDL), the Stock Holding Corporation of India Limited (SHCIL), and the National Securities Clearing Corporation Limited (NSCCL) to open SGL accounts with the RBI—have simplified retail ownership. The RBI also permitted NSDL and CDSL to open secondary SGL accounts for depository participants, who can hold government securities in custody for end investors; together, these changes eased procedural hurdles and made it possible to hold government stock in demat form.

To give retail investors easier access, the RBI encouraged the creation of mutual funds focused exclusively on government securities—gilt funds—and provides special liquidity support up to 20 percent of their investment in dated government securities. While primary dealers typically sell gilts with a minimum investment of Rs. 25,000, gilt funds offer individuals access with a much lower entry point (about Rs. 5,000), helping broaden the investor base. Several initiatives by banks and primary dealers—for example, using bank branch networks and tie-ups with depositories—have sought to popularize gilt funds and government securities among retail customers, and dedicated gilt funds eligible for RBI liquidity support have grown in number.

To further encourage retail participation in the primary market, the RBI introduced a non‑competitive bidding facility on December 7, 2001. Under this scheme, retail bidders could be allocated up to 5 percent of the notified amount at the weighted average rate determined by competitive bids; the facility became operational on January 14, 2002. Retail trading on stock exchanges (NSE, BSE) and OTC Exchange of India began on January 16, 2003, with a low minimum order size intended to attract smaller investors. Despite these reforms, trading through exchanges has not significantly boosted retail activity.

Several practical obstacles remain. Banks have been cautious about actively marketing government securities to retail clients for fear of displacing their own deposit base, and not all intermediaries given access to a second SGL account have used that facility to promote retail sales. Promoting retail demand will therefore require coordinated efforts: primary dealers and banks should be supported in building awareness, providing easy buy‑and‑sell facilities to assure liquidity, and using the stock exchange and gilt‑fund networks to reach a wider set of investors. With the right infrastructure and active outreach by intermediaries, the retail segment can be expanded to strengthen the overall government securities market.

RBI Management of Government Debt

The Reserve Bank of India permits Foreign Portfolio Investors (FPIs) to invest in central government securities and State Development Loans (SDLs). To manage foreign participation in the domestic debt market, the RBI reviews and revises these investment limits every quarter.

For central government securities, the limits (expressed in INR billion) were structured into two components: a general limit applicable to all FPIs and an additional allowance for long-term FPIs, the sum of which gives the overall ceiling. Under the existing limits prior to the April–June 2017 quarter, the general limit for all FPIs stood at 1,520 billion, with an additional 680 billion set aside for long-term FPIs, making a total ceiling of 2,200 billion. For the April–June 2017 quarter the RBI increased these limits to 1,565 billion for all FPIs, 745 billion additional for long-term FPIs, and a revised total ceiling of 2,310 billion.

In 2006 the Reserve Bank of India took two complementary steps to deepen the government securities market: it liberalised short-selling and it authorised a formal “when‑issued” trading window. Initially, the RBI permitted intra‑day short‑selling of government bonds provided the seller covered the position by buying the bonds in the secondary market on the same trading day. In July 2006 this was relaxed for scheduled commercial banks and Primary Dealers (PDs), who were allowed to cover short positions in Central Government Securities within an extended period of up to five trading days, including the option to borrow and deliver the security through the repo market. These measures were intended to improve liquidity and make market-making more flexible.

In May 2006 the RBI issued detailed guidelines to develop a when‑issued market — shorthand for “when, as and if issued.” When‑issued trades are conditional transactions that are contracted ahead of a primary auction and are settled only if and when the security is actually issued. By allowing trading before the auction, the when‑issued market helps participants hedge against price moves after the auction, stretches the effective distribution period for large issues, and reduces uncertainty around auction outcomes, thereby aiding price discovery and smoother absorption of supply.

The RBI’s guidelines set out specific operating rules for when‑issued transactions:

1. When‑issued trading may be used for both new securities and those that are being reissued.
2. Trading begins on the auction notification date and ends on the working day immediately preceding the date of issue.
3. Regardless of trade date, all when‑issued transactions are contracted to settle on the date of issue.
4. On the settlement date, trades in the when‑issued security can be netted off against trades in any existing security.
5. When‑issued transactions are permitted only on the Negotiated Dealing System – Order Matching (NDS‑OM) platform.
6. Every when‑issued trade must have a Primary Dealer as one counter‑party; both buyer and seller may be PDs, but non‑PDs cannot be both sides of a when‑issued trade.
7. Only PDs may take uncovered short positions in the when‑issued market. Non‑PDs may sell a when‑issued security only if they already hold a purchase contract for an equivalent or larger amount.
8. Open position limits apply: non‑PDs may hold long positions up to 5% of the notified amount (effectively a buy‑side limit for banks); PDs may hold long or short positions up to 10% of the notified amount.
9. If a PD cannot deliver the security on the settlement (issue) date, the transaction is handled under the default settlement mechanism of the Clearing Corporation of India Ltd. (CCIL).
10. If an auction is cancelled for any reason, all when‑issued trades in that security are treated as null and void ab initio on grounds of force majeure.

With these rules in place, trading in a when‑issued security may begin from the day after the auction announcement, with settlement scheduled for the issue date. The facility gives PDs clearer signals about the amounts they may need to underwrite and the likely yields of a new security, while the position limits encourage wider distribution of any given issue and reduce the risk of market concentration. Trading under the RBI guidelines began with central government auctions in the calendar week of 1–8 August 2006. Internationally, vibrant when‑issued markets exist in jurisdictions such as the United States for both bonds and equities.

The mid-1950s saw the widespread use of ad hoc treasury bills as a convenient way for the central government to finance its deficit. To ensure the smooth conduct of government business, the Centre and the Reserve Bank of India agreed an administrative arrangement that required the government to maintain a minimum cash balance of Rs 50 crore on Fridays and Rs 4 crore on other days. Whenever the cash balance fell below these levels, the RBI automatically issued fresh ad hoc treasury bills sufficient to restore the minimum balance. What was intended as a temporary facility therefore became effectively permanent and cumulative, offering the government virtually unlimited access to RBI resources. The instrument proved attractive because it carried a low interest rate—4.6 per cent per annum since 1974.

RBI credit to the government increases reserve money; when the central bank buys government securities or advances funds, the budgetary deficit becomes monetized. By definition, the monetized deficit is the rise in the net RBI credit to the Centre—measured as the increase in the RBI’s holdings of dated government securities and treasury bills, rupee coin issues, and loans and advances to the government—adjusted for changes in the Centre’s cash balances with the RBI (the relevant accounting treatment was formalized from April 1, 1997). Because the RBI was effectively compelled to finance ad hoc bills, the central bank’s credit to government expanded with little constraint, fuelling money‑supply growth and adding to inflationary pressures. This arrangement weakened the RBI’s ability to control monetary conditions.

To restore the effectiveness of monetary policy, the government and the RBI agreed to curtail and finally eliminate ad hoc financing by imposing an annual ceiling on treasury bill issues, progressively lowering that ceiling and moving to a new mechanism. The phase‑out was implemented in three stages. First, quantitative limits on the creation of ad hoc treasury bills operated during 1994–95 to 1996–97. Second, a two‑year transition beginning 1 April 1997 eliminated ad hoc T‑bills and introduced the new system of Ways and Means Advances (WMA); overdrafts beyond the WMA limit were permitted only after ten continuous working days and carried a penal cost. Third, the full‑fledged WMA framework has been in operation since April 1999, providing a structured and time‑bound facility for temporary government cash mismatches while preserving the RBI’s autonomy over monetary policy.

Ways and Means Advances (WMA) is a short-term facility provided by the Reserve Bank of India to help the government manage temporary mismatches between its receipts and payments. It is not intended as a source of budgetary finance but as a cash-management tool to smooth day-to-day liquidity needs.

The overall WMA limit and the interest rate applicable are agreed periodically between the RBI and the government. Withdrawals that exceed the agreed limit are permitted only for a maximum of ten consecutive working days. If the government utilises 75 per cent of the agreed WMA limit, the RBI expects corrective action in the form of fresh issuance of government securities to meet the cash requirement.

When ad hoc Treasury bills and the 91-day tap Treasury-bill system were discontinued with effect from April 1, 1997, the outstanding ad hoc and tap bills as at March 31, 1997 were converted into special securities without a specified maturity date and carrying an interest rate of 4.6 per cent per annum. The introduction of WMA and the end of those temporary bill arrangements changed the way fiscal shortfalls were viewed.

Consequently, the conventional concept of a budget deficit ceased to be the central measure; instead, the Gross Fiscal Deficit (GFD) became the key indicator. GFD is defined as the excess of total expenditure (including loans, net of recoveries) over revenue receipts (including external grants) and non-debt capital receipts.

Because WMA is meant only for temporary liquidity support, it is not included in budget estimates and is charged at a market-related interest rate. Its use should therefore be limited and periodically unwound rather than relied upon as a means of financing the fiscal deficit.

Ways and Means Advances (WMA) offers several advantages. Because WMA is not intended as a permanent source of financing for the fiscal deficit, it is unlikely to exert undue pressure on the money supply. By relying on auction-based market borrowing for the government’s overall borrowing programme, WMA also helps reveal the market’s assessment of both the issuer (the Government) and investors; this greater transparency deepens the government securities market and provides a clearer benchmark for pricing private corporate debt against risk-free government paper.

At the same time, WMA gives the Reserve Bank of India greater discretion and flexibility in choosing assets and managing system liquidity, strengthening its ability to smooth short-term funding mismatches. However, this arrangement imposes a clear obligation on the central government: if fiscal imbalances force a disproportionate increase in market borrowing, yields on government securities will rise and that upward pressure will transmit through the entire interest-rate structure.

The Reserve Bank of India is responsible for setting limits for Ways and Means Advances (WMA) to the Government of India and for determining the terms on which these advances are extended. In the late 1990s and early 2000s the WMA limits were periodically reviewed and trimmed; at the same time the interest rate basis was changed from the cut‑off yield on 91‑day treasury bills to the bank rate. Overdrafts carried an interest charge of the bank rate plus two percentage points. The government is required to maintain a minimum balance with the RBI—larger balances at certain key junctures such as the close of the financial year and specific dates—and overdrafts from the WMA facility are restricted in duration (normally not exceeding ten consecutive working days). When government use reaches about three‑quarters of the sanctioned WMA limit, the RBI may, depending on market conditions, initiate fresh market borrowings.

The WMA mechanism was revised on April 19, 2006 in consultation with the government. From that date limits have been fixed on a quarterly rather than a half‑yearly basis, with the RBI retaining flexibility to change the limits in consultation with the government. The interest rate linkage was shifted from the bank rate to the repo rate: WMA now carry interest at the repo rate, while overdrafts are charged at repo rate plus two percentage points. From 2010–11 onwards the WMA limits were scaled up to reflect higher central government expenditure; for the first half of 2017–18 the WMA limit was set at 60,000 crore.

During the global liquidity squeeze of 2008–09 and in subsequent years the government relied on WMA for a larger number of days to meet routine expenditure and to finance fiscal stimulus measures. This episodic higher use underscores the role of WMA as a temporary liquidity support, while preserving market discipline through limits, pricing and the RBI’s option to mobilise market borrowings when utilisation becomes high.

Issuance of Government Securities

Debt instruments are first issued in the primary market, where they are initially subscribed by investors and may later be traded in the secondary market. On behalf of the Government of India, the Reserve Bank of India issues government securities; its primary market operations are guided by the debt management policy, whose main objective is to meet the government’s fiscal financing needs from the market in a cost‑effective manner.

The principal instruments in the primary market are treasury bills (T‑bills) and government dated securities. The central government raises funds through both T‑bills and dated securities, while state governments mobilize resources exclusively through dated securities.

T‑bills are short‑term obligations issued by the RBI through regular auctions held weekly or fortnightly. Until 2000, the T‑bill spectrum included 14‑day, 91‑day, 182‑day and 364‑day maturities; the 14‑day and 182‑day issues were discontinued from 14 May 2001. Since April 1998, the RBI has followed the practice of notifying the amounts to be auctioned for all T‑bill maturities, including the 364‑day paper, and it adjusts those notified amounts as necessary to manage temporary cash mismatches arising from government expenditures and prevailing liquidity conditions.

The 91‑day auctions play a key role in managing the government’s cash position because tax and other revenues tend to be concentrated toward the end of the financial year while expenditures are distributed more evenly. The minimum denomination for 91‑day T‑bills is Rs 2,25,000 and for 364‑day T‑bills is Rs 71,00,000. 91‑day auctions are held every Wednesday; 364‑day auctions take place fortnightly on the Wednesday preceding reporting Fridays. Auctions are open to resident individuals and corporates, and settlement for both 91‑day and 364‑day bills occurs on the following Friday. In 2001–02 the payment dates for these bills were synchronized to create a more fungible stock of T‑bills of varying maturities in the secondary market.

Government Securities: Issuance and Market

Government of India securities are medium- to long-term debt instruments issued by the Reserve Bank of India on behalf of the central government to finance fiscal deficits and fund public sector development programmes. They are the benchmark fixed-income instruments in the Indian market and form a key part of government borrowing.

Most government securities carry fixed coupons, with interest paid semi-annually using a 30/360 day-count convention; however, floating-rate and zero-coupon variants are also issued from time to time. No tax is deducted at source (TDS) on the interest paid on these securities. All such securities are eligible to be held by banks as part of their Statutory Liquidity Ratio (SLR) requirements, which enhances their acceptability among financial institutions.

Central government securities are eligible for the ready forward (repo) market, which provides short-term liquidity by allowing these securities to be sold and repurchased; state government loans, by contrast, are not eligible for repo transactions. The combination of sovereign backing, SLR status and repo eligibility (for central issues) makes government securities among the most liquid and widely traded instruments in India’s debt market.

Government securities in India are issued in the primary market through three routes: auction, direct sale, and private placement, all managed by the Reserve Bank of India (RBI) acting as the government’s banker and debt manager. Since June 1992 the government has preferred auctions because they reveal price information, broaden participation, reduce reliance on underwriting, and generally lower the cost of borrowing. The RBI announces the borrowing calendar as part of the budget process and conducts auctions as and when funds are needed, taking into account market liquidity and interest rate conditions.

An auction begins with a public announcement of the security’s quantum, maturity and auction date. Participants submit bids specifying the amount and the yield (in yield-based auctions) or price (in price-based auctions) they are willing to accept. The RBI determines a cut-off yield or price based on competitive bids and its assessment of prevailing interest rates. In a yield-based auction—typically used for new issues—bids are ranked in ascending order of yield and the cut-off yield that exhausts the notified amount becomes the coupon rate; bids at or below the cut-off yield are accepted, while higher-yield bids are rejected. If multiple bids are placed at the cut-off yield, allotment among them is made pro‑rata so that the notified amount is not exceeded. In a price-based auction—used for re-issues of existing securities—bids are ranked in descending order of price and those at or above the cut-off price are accepted.

To ensure market liquidity and to consolidate the stock of outstanding securities, since the late 1990s the RBI has increasingly reissued existing stocks through price-based auctions rather than creating many small, distinct issues. This consolidation supports the emergence of benchmark securities and the development of separately traded interest and principal components. The uniform-price auction format, previously limited to 91-day treasury bills, was extended to dated securities in November 2001. Besides fixed-rate instruments, auctions are used to issue floating-rate and inflation-indexed bonds. In July 2002 the government introduced a 10-year bond with call and put options exercisable on half-yearly coupon dates from the fifth year onwards, with both issuer and investor having symmetric buy-back or sell-back rights on notified terms.

Auctions accommodate both competitive and non-competitive bidders. Competitive bidders include primary dealers, banks, mutual funds and financial institutions. To encourage smaller or less sophisticated investors, the RBI introduced a non-competitive bidding facility: a portion of the notified amount (up to 5 per cent in specified auctions) is reserved for non-competitive bids by retail and institutional small investors, state and local governments, provident funds and similar entities. Non-competitive bidders participate through banks or primary dealers and receive securities at the weighted average price determined in the competitive segment. The non-competitive facility was operationalized in January 2002 for certain dated securities.

Historically, the RBI sometimes sold securities directly at pre-announced prices rather than auctioning them; this route was used more often in the past, for example for many state loans up to 2005–06. Private placement with the RBI occurs when market conditions—extremely tight liquidity or expectations of high yields—make a public auction impractical. In such cases the RBI temporarily places securities with itself to fund the government and later sells them through its sale window when market conditions improve; this also signals the RBI’s view on interest rates.

The size, maturity and structure of government borrowing shape the development of the government securities market. Market borrowings by the centre and states have grown substantially since the early 1990s, driven by rising repayment obligations on outstanding debt, the abolition of ad hoc and tap treasury-bills in the mid-1990s, and fiscal deficits that have been financed increasingly from the market. By the late 2000s and 2010s, a large share of the fiscal deficit has been met through market borrowing, and interest payments constitute a significant portion of government revenues. Heavy market borrowing can push up nominal interest rates, crowd out private investment, increase corporate borrowing costs, and impose a long-term fiscal burden.

To moderate interest rates and manage the stock of debt, the RBI and the government have used a combination of tools: direct devolvement or private placement when necessary, open market operations, price-based reissues to consolidate outstanding stocks, and policies to elongate the maturity profile of debt. These measures aim to build deeper, more liquid benchmark issues and reduce redemption pressures. For example, the Union Budget for 2017–18 announced net market borrowings of Rs 4,232 billion (BE), alongside planned buybacks and a security-switching program designed to lengthen maturities and smooth near-term redemption obligations.

Government Securities: Ownership and Market Structure

The subscribers to government securities include the Reserve Bank of India (RBI), commercial banks, insurance companies, mutual funds, provident funds and other institutional investors. Despite a series of reforms intended to broaden the primary market for government paper, ownership remains concentrated in a few captive investors—chiefly commercial banks and insurance companies. Banks have been the largest holders, largely because of statutory liquidity requirements; on average they account for about 35 per cent of the stock of government securities even after the statutory liquidity ratio (SLR) was reduced to 23 per cent in 2013. Banks have tended to invest well beyond the SLR because government securities have offered market‑related interest rates since 1992–93, are perceived as risk‑free, and were more attractive when commercial credit demand was weak.

This narrow ownership base has two important implications for the government. First, heavy reliance on a small group of holders strains the market’s absorptive capacity when the government increases borrowing. If banks are already holding large portfolios of government paper, their willingness to take on new issuances depends on how returns on those securities compare with returns on competing assets—especially loans and advances. When economic conditions improve and credit demand rises, banks may prefer to expand lending rather than subscribe to new government paper. Second, concentration of holdings in a few large investors can make downward adjustment of interest rates on government securities less flexible, complicating the government’s efforts to achieve its targeted market‑borrowing programme.

The RBI’s own share of government securities fell sharply after reforms, from 20.3 per cent in 1990–91 to 2.0 per cent in 1994–95, a decline that reflected the development and deepening of the market. This trend later reversed: in 1997–98 the RBI’s holdings rose to 10.7 per cent when certain special securities in the central bank’s portfolio were converted into marketable lots to facilitate open market operations. By 2016 the RBI’s share had increased further to 14.6 per cent.

The Reserve Bank’s absorption of primary issues fell sharply as the government securities market developed: its share dropped from 49.3 per cent in 1990–91 to 1.8 per cent in 1994–95 as the market’s capacity to absorb government paper increased. An exception occurred in 1998–99, when the Centre turned to gross market borrowings; to limit the immediate monetary impact, a portion of these issues was privately placed with the Reserve Bank. The RBI subsequently managed the liquidity consequences by selling these securities into the market at opportune moments through open market operations.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 further curtailed the RBI’s role in primary auctions by prohibiting its participation from 1 April 2006. Reflecting this shift, the Reserve Bank’s subscription to primary issues fell substantially during 2004–05, and in 2005–06 gross issues totalling 710,000 were privately placed with the RBI at the year’s end. Since 2007–08, the RBI has not subscribed to the central government’s primary issues.

Since the shift to market-related interest rates for meeting its borrowing needs, the central government’s outstanding dated securities have shown a marked change in maturity composition. Historically, the maturity profile was heavily skewed toward the short end: the government relied largely on short‑ and medium‑term papers because uncertain market conditions and investor preference for shorter maturities made them easier and cheaper to place. This was also a deliberate policy choice to minimise immediate borrowing costs by concentrating issuance at the short end.

However, this short‑biased structure created its own problems. Heavy reliance on short-term securities increased gross borrowings because large volumes had to be raised at frequent intervals to meet repayment schedules, generating significant redemption pressure and refinancing risk. To reduce these risks and the attendant cost of repeatedly rolling over debt, the government progressively avoided excessive short-term issuance and began issuing longer-term securities from around 1999–2000 onward. A period of low inflation together with the deepening of the government securities market further supported this successful elongation of maturities.

Yields in the primary market measure the interest cost at which the government borrows from investors. These rates are shaped mainly by liquidity conditions in the economy, the timing and size of government borrowings, and interventions by the Reserve Bank of India—such as accepting devolvement and arranging private placements when necessary.

Between 1990–91 and 1995–96 the weighted average interest rate on central dated securities rose steadily from 11.41% to 13.75%, reflecting heavier reliance on market borrowing and episodes of tight liquidity that pushed up borrowing costs. From 1996–97 onward rates began to fall, and by 1999–2000 the yields were close to the levels seen in 1991–92. Although the central government’s market borrowings increased, the RBI was able to moderate interest rates through its interventions—accepting private placements and releasing securities to the market when rate expectations improved—which, together with softer money-market liquidity, helped contain yields. Primary-issue yields eased in 2003–04, but tightened again in subsequent years as interest rates hardened and liquidity conditions turned tight. Since 2015–16 the weighted average yields have declined, reaching 7.5% in 2016–17.

The yield curve shows how yields vary across securities that differ only by maturity. It maps the rates at which the same borrower can borrow for different time horizons, and the most closely watched series is the yield curve for government securities, which serves as the closest approximation to a risk‑free yield. Other curves, such as those for corporate borrowers, are best interpreted relative to this risk‑free benchmark.

Plotted with yield on the vertical axis and term to maturity on the horizontal, the yield curve changes day to day and can move substantially over months. Its normal form is upward‑sloping, meaning longer‑dated securities command higher yields than short‑dated ones. If long‑term rates rise relative to short‑term rates, the curve steepens; if short‑term rates rise relative to long‑term rates, the curve flattens. An inverted yield curve — where short‑term rates exceed long‑term rates — often signals monetary tightening or a credit squeeze by the central bank and reflects weakening inflationary expectations; in such circumstances investors accept lower long‑term nominal yields than those available in the short term.

Empirical research across countries shows that the slope of the yield curve contains valuable information about the future path of macroeconomic variables and is widely used to forecast short‑term interest rates. For example, when investors repeatedly prefer short‑term (money‑market) instruments over long‑term instruments and the curve steepens, it signals expectations of higher short‑term yields in the future. Conversely, an inverted curve can reflect temporary imbalances in short‑term money or foreign‑exchange markets and changing inflation expectations, which shift demand between short and long maturity securities.

In India, liquidity conditions and thin trading in the secondary market for government securities historically produced frequent shifts in the term structure of interest rates in the primary market. The yield curve inverted in 1993–94 amid episodes of tight liquidity. It moved downward in 1994–95, then shifted upward in 1995–96 and 1996–97. Differences in short‑ and long‑term inflation expectations, coupled with temporary pressures in short‑term money and foreign‑exchange markets, contributed to those inversions. A decline in yields occurred in 1997–98 and 1998–99 when the Reserve Bank’s private placements to itself and a comfortable money‑market liquidity position eased pressures on rates.

Subsequent years saw further variation: 2001–02 recorded declines in both short‑ and long‑term yields; 2003–04 witnessed a flattening of the curve as long‑term yields fell on surplus liquidity; and the curve shifted upward during 2006–07, 2007–08 and 2011–12 as interest rates rose across the maturity spectrum. From 2015–16 onwards the yield curve began trending downward, driven by policy and market‑structure improvements such as planned, predictable issuance calendars, instruments better matched to investor preferences, and greater transparency through timely communication with the market — all of which helped lower yields.

The secondary market for government dated securities in India is broadly divided into two segments: a wholesale institutional segment and a retail segment. The wholesale institutional market is dominated by large participants—commercial banks, primary dealers, mutual funds, insurance companies and similar players. Trades in this segment are carried out largely in SGL (Subsidiary General Ledger) form and the standard market lot is high (₹25 crore). Most transactions are negotiated and finalised by phone, subsequently reported on the wholesale debt market segment of the National Stock Exchange, and settled through the Reserve Bank of India, which functions as the depositing‑cum‑clearing house.

The retail segment comprises smaller financial entities such as cooperative banks, provident funds and non‑banking finance companies. Retail trades may be in SGL form or in physical certificates and typically involve odd lots—i.e., amounts under ₹21 crore. These transactions are usually settled directly between counterparties and are not always reported on an exchange, since the costs of reporting small deals can make it uneconomical for brokers.

To deepen the retail market and improve liquidity for smaller investors, banks were permitted to buy and sell government securities on an outright basis at prevailing market prices without restrictions on the interval between sale and repurchase. Banks were also allowed to transact among themselves or with non‑bank clients through members of the Over The Counter Exchange of India (OTCEI) in addition to the NSE. Further, interest income on government securities was exempted from tax deduction at source (TDS) from June 1997 to encourage quotations and trading in the secondary market. Despite these measures, the government securities market continues to be predominantly institutional.

Secondary Market Trading Mechanisms

In the secondary market, securities can be traded in one of three ways: over-the-counter (OTC), via the Negotiated Dealing System (NDS), or through the Negotiated Dealing System—Order Matching (NDS‑OM). OTC refers to direct bilateral transactions between counterparties, while NDS and its NDS‑OM variant are electronic dealing platforms, the latter employing an order‑matching mechanism.

In the over-the-counter (OTC) or telephone market for government securities, a participant wishing to buy or sell contacts a counterparty—typically a bank, a Primary Dealer or another financial institution—either directly or through a broker registered with SEBI. Negotiations over the quantity and price are usually conducted by telephone, and a trade is concluded once both parties agree. All transactions executed in this market must be reported on the NDS platform within 15 minutes of the telephone deal.

The Negotiated Dealing System (NDS) was introduced in February 2002 to provide an electronic platform for dealing and reporting transactions in government securities. It enables members to submit bids or applications electronically for primary issuances during auctions and interfaces with the Securities Settlement System (SSS) of the Public Debt Office, RBI, Mumbai, thereby facilitating settlement of both outright and repo transactions executed in the secondary market. Membership of the NDS is restricted to entities that maintain a Subsidiary General Ledger (SGL) and/or a Current Account with the RBI, Mumbai.

In August 2005 the RBI added an anonymous, screen-based order-matching module to the NDS, known as NDS-OM. This is an order-driven system in which participants trade anonymously by placing orders or accepting orders already on the book. NDS-OM is operated by the Clearing Corporation of India Ltd. (CCIL) on behalf of the RBI. Direct access is available only to selected financial institutions — such as commercial banks, primary dealers, insurance companies and mutual funds — while other participants access the system through custodians with whom they maintain Gilt Accounts. Custodians therefore place orders on behalf of clients (for example, urban co-operative banks). The principal benefits of NDS-OM are greater price transparency and improved price discovery.

Operationally, participants enter orders specifying price and quantity and may modify or cancel them before execution. The matching engine pairs bids and offers according to price and then time priority. NDS-OM provides separate screens for Central Government securities, State Government securities and Treasury bills, and it includes an odd-lot screen to facilitate trading by small participants in lots smaller than Rs 5 crore (the standard market lot). The platform’s anonymity means counterparties are not revealed; once an order is matched a deal ticket is generated automatically and trade details are routed to CCIL. Because counterparties are hidden, pricing is less likely to be influenced by a participant’s size or market standing.

Gilt Account holders are given indirect access to the NDS and NDS-OM through custodial institutions. A direct-access member can report transactions conducted on behalf of a Gilt Account holder, and custodians can place orders for their clients on NDS-OM. However, two Gilt Account holders of the same custodian are currently not permitted to undertake repo transactions directly between themselves.

Government securities are also tradable on stock exchanges such as the NSE and BSE, which provide facilities tailored to the needs of retail investors.

Clearing and Settlement of Government Securities

In the primary market, once auction allotments are finalised successful bidders are told the amount they must pay on the settlement date. Settlement cycles differ by instrument: dated government securities settle on T+1, while Treasury bills settle on T+2. On settlement day participants’ bank accounts are debited for the payment and their holdings in the government securities ledger are credited with the allotted securities.

Secondary market trades in government securities are settled through participants’ securities and current accounts maintained with the Reserve Bank of India, with delivery and payment handled on a net basis. The Clearing Corporation of India Limited (CCIL) guarantees settlement by becoming the central counterparty to each trade through novation, thereby replacing the original counterparty link and removing bilateral counterparty risk. Outright trades are settled on T+1, while repo transactions allow flexibility: the first leg may be settled on either T+0 or T+1 depending on participants’ needs.

Settlement and custody are conducted through the Reserve Bank’s subsidiary ledgers. The public debt office maintains the Subsidiary General Ledger (SGL) accounts in which physical securities are held in dematerialised book-entry form. Market participants who cannot hold direct SGL accounts may use constituent or SGL-II accounts offered by banks, the National Securities Clearing Corporation Limited (NSCCL), insurance companies, financial institutions and primary dealers. Trades among participants are executed by exchanging SGL instructions and settled on a delivery-versus-payment (DVP) basis so that transfer of securities is synchronised with cash payment.

India’s DVP framework has evolved. Initially the RBI operated DVP-I, under which funds and securities were settled on a gross basis. On 2 April 2004 the RBI introduced an enhanced system, known as DVP-III, which permits netting of transactions. DVP-III improved liquidity and trading efficiency, especially for repos, by allowing participants to sell bonds on the same day they contract to purchase them and by enabling limited short sales when purchases are guaranteed by CCIL or the RBI. To ensure delivery under such arrangements the purchase leg must precede the sale and settlement cycles of the two legs must be compatible (for example, securities bought on T+0 may be sold on T+0 or T+1). DVP-III also facilitates rollovers of repo contracts guaranteed by CCIL, subject to renegotiation of prices and repo rates.

Operationally, the Public Debt Office oversees transfers through SGLs. For an inter‑participant transfer the seller completes the SGL transfer form, the buyer countersigns and the seller forwards it to the RBI while the buyer moves the funds. Inter‑bank trades are typically settled on the same business day; trades with non-bank counterparties may settle on the same day or up to five business days later. On ordinary business days banks may transact with each other in the secondary market until 1:00 p.m. for same‑day settlement; trades after that hour settle the next day. Transfers of government securities attract no stamp duty or transfer fee and there is no tax deduction at source. Where physical certificates are used, transfer is effected by executing the transfer deed and lodging the certificates with the RBI. Since 11 May 2005 settlement of secondary market transactions in government securities has been standardised to T+1.

The development of a vibrant secondary market has been an explicit policy objective because liquidity in the secondary market supports a healthy primary market. Reforms to deepen the market have included the introduction of SGL transactions for transparency, allowing new participants such as the Discount and Finance House of India into treasury and dated securities, and the creation of market infrastructure institutions such as the Securities Trading Corporation of India (established in May 1994). The primary dealer and satellite dealer systems were introduced to improve trading, liquidity and turnover, while the shift to market-related interest rates strengthened price discovery in the secondary market.

To broaden participation, the RBI issued guidelines in June 1996 enabling banks to retail government securities to non-bank clients, and it introduced electronic measures—DVP settlement for SGL transactions, electronic balance enquiry and expansion of MICR cheque clearing to non-metropolitan centres. Plans to use VSAT terminals aimed to improve communications, payments and centralized securities settlement. The RBI also encouraged retail participation through gilt funds—mutual funds investing exclusively in government securities—by extending liquidity support up to 20 per cent of their holdings by way of reverse repos in central government securities outstanding at the end of the previous month. To further stabilise liquidity, the RBI provides two‑way quotes through its sale window on a rotating list of securities.

Looking ahead, the RBI planned to adopt a true real‑time gross settlement model (RTGS) for government securities clearance and settlement, in which transactions are settled immediately on a gross basis, removing the need for netting but requiring participants to maintain sufficient intraday liquidity. To address this, the RBI proposed to provide intraday liquidity support so participants could meet claims as they arise.

Since SGL operations began in September 1994, secondary market activity has grown steadily, reflecting deeper market liquidity and increasing outright turnover as well as repo activity in eligible securities and Treasury bills. The NSCCL has been permitted to open SGL accounts to offer constituent SGL services, creating a common clearing and settlement framework that reduces counterparty risk. While many wholesale trades are still executed by telephone, a substantial and growing share are routed through exchange brokers, notably on the NSE’s Wholesale Debt Market (WDM) segment. Dated securities account for a significant portion of WDM transactions, with banks and trading members remaining the dominant participants in that segment.

Medium-Term Debt Management Framework

The Reserve Bank, in consultation with the Government, formulated the Medium Term Debt Management Strategy (MTDS) on 31 December 2015 for a three‑year period (2015–16 to 2017–18). The MTDS rests on three interlinked objectives: lowering borrowing costs, mitigating various debt‑related risks, and developing the government securities market. These objectives are to be pursued in line with international best practices while taking into account India’s domestic economic and financial conditions.

To contain costs and strengthen market functioning, the strategy emphasises predictable, planned issuance calendars, better alignment of instruments with investor preferences, and timely communication to improve transparency. Market development measures include introducing new instruments, broadening the investor base—especially retail investors—and upgrading market infrastructure so that participants can access auctions and secondary markets more easily.

Risk mitigation is addressed through a range of liability‑management tools. Rollover risk will be contained by elongating the maturity profile, using switches and buybacks to manage the maturity mix, and placing limits on fresh issuances and on annual maturities. Interest‑rate risk will be limited by keeping floating‑rate debt at a low share of outstanding liabilities. Foreign‑exchange risk exposure will be restrained by favouring domestic‑currency issuance, nurturing a stable domestic investor base, and allowing a calibrated opening of the gilt market to foreign investors.

Operational measures to ensure smooth completion of the central government’s borrowing programme include continuing the practice of front‑loading dated security issuances, active switching of securities as market conditions evolve, and a concerted effort to elongate maturities. The MTDS itself is to be reviewed and rolled forward—in effect extending the medium‑term framework into the next cycle (2016–17 to 2018–19).

Institutional and market initiatives will support these objectives. The Cash Coordination Committee (CCC), with members from the Government of India and the Reserve Bank, will improve information sharing, cash‑flow forecasting and cash management. Features of the Sovereign Gold Bond (SGB) scheme launched in 2015–16 will be refined to broaden retail participation. A market‑making scheme will be designed to enhance secondary market liquidity and provide a retail push for government securities. Overall, the Reserve Bank will continue efforts to deepen the g‑sec market, increase predictability for market participants, and facilitate easier access to the auction process.

Open Market Operations and Repos

The Reserve Bank of India relies mainly on two tools to steer liquidity in the government securities market: repos and open market operations. Repos (and the corresponding reverse repos) are short-term, collateralised transactions through which the RBI either injects liquidity into the system or absorbs it; these were discussed earlier in Chapter 4. By varying the volume and tenor of repos and reverse repos, the RBI manages day-to-day and short-term liquidity fluctuations.

Open market operations, by contrast, are the RBI’s instrument for influencing longer-term liquidity conditions. When it wants to withdraw excess liquidity, the RBI conducts open market sales of government securities—often coordinated with private placements or devolvement arrangements—to absorb funds. In periods of tight liquidity, the RBI resorts to open market purchases to put money back into the system. Together, these tools allow the RBI to fine-tune liquidity across different time horizons.

Open market operations (OMOs) are a central bank’s principal tool for managing liquidity. Widely used in advanced economies such as the UK and the USA, OMOs are deployed to neutralise excess liquidity, smooth sharp movements in domestic money and foreign exchange markets, and influence the availability and cost of credit. The two immediate objectives are to alter commercial banks’ reserves so as to regulate their capacity to create credit, and to move market interest rates.

Operationally, OMOs consist of the central bank’s sale or purchase of government securities. When the Reserve Bank of India (RBI) sells government securities, bank deposits are used to buy those papers, thereby reducing banks’ surplus cash—meaning the cash balances available over and above the statutory cash reserve ratio (CRR). With lower surplus cash, banks must curtail lending to meet reserve requirements, credit creation falls and the money supply contracts. Conversely, when the RBI buys government securities, sellers receive cash that increases banks’ surplus balances, expanding their ability to extend credit and raising the money supply. Thus OMOs transmit monetary policy into changes in bank credit and market interest rates.

It is important to note that OMOs do not change the overall stock of government securities outstanding; they only change who holds them. Open market sales reduce the net RBI credit to government and increase the government credit held by other banks and co‑operatives, without directly affecting the fiscal deficit. Through timing and the choice of instruments, the RBI can therefore influence banks’ resource positions, yields on government paper, and the effective cost of bank credit.

The RBI has broad operational freedom in OMOs: it can buy, sell or hold government securities of all maturities. Until 1991–92 the market for OMOs was narrow because interest rates were largely administered and the government securities market lacked depth. Reforms to develop both primary and secondary markets broadened the OMO market and made it a key instrument of debt and liquidity management. The RBI introduced repo‑based sales, began offering only selected securities in response to market conditions rather than its entire dated portfolio, and placed a few securities on a purchase list to ensure liquidity in at least some issues.

To increase the stock of marketable securities for active OMOs, the RBI converted special non-marketable securities into marketable paper in 1997. Special securities worth 715,000 crore at 4.6% were converted into 10‑, 7‑ and 8‑year marketable instruments carrying yields of 13.05%, 12.59% and 11.19% on June 3, June 18 and August 12, 1997, respectively. The extra interest cost arising from this conversion was borne by the RBI and remitted to the government as part of its transfers of profits. In 1998–99 the RBI also began including treasury bills of varying maturities in its OMO operations, reflecting a shift from direct to indirect instruments of monetary control.

OMOs have been used not only to absorb or inject liquidity but also for grooming or switching operations—selling long‑term scrips in exchange for short‑term paper—to help lengthen the maturity profile of government debt, a development favourable for monetary policy implementation. Over the 1990s the volume of RBI net sales (sales minus purchases) generally rose, with the notable exception of 1994–95 when money market conditions were tight. From 1996–97 onward OMOs gained greater prominence: outright sales were used to mop up excess liquidity arising from large capital inflows and to stabilise domestic interest and exchange rates. Open market sales increased sharply—by around 290% in 1998–99—and the RBI did not make net purchases through its OMO window that year.

In 2000–01, faced with uncertain foreign exchange conditions and an unfavourable market for government paper, the RBI privately placed securities with itself; these were later sold on‑tap and through OMO auctions. After the September 11, 2001 shocks, the RBI carried out a series of open market purchases totalling about 5,084 crore between September 18 and October 10, 2001, to support government securities markets. Once market conditions stabilised and liquidity pressures eased, the RBI resumed open market sales to absorb surplus liquidity and to offload securities that had been privately placed. The RBI again used outright purchases in 2008 and in subsequent years to ease market liquidity, illustrating the continuing role of OMOs in India’s monetary management toolkit.

Primary Dealer Framework and Regulation

The government securities market is the principal segment of the broader debt market, and its effective functioning depends on a robust market infrastructure and a wide base of active participants. A developed market needs many players with diverse views who are willing and able to trade continuously, thereby supplying the liquidity necessary for price discovery and efficient allocation of funds.

In the first phase of financial reforms, the government sought to build this infrastructure by creating specialized institutions to stimulate secondary market activity. The establishment of the Securities Trading Corporation of India (STCI), alongside the Discount and Finance House of India (DFHI), was an early and important step aimed at developing an active secondary market in government securities. To reinforce this framework, the Reserve Bank of India introduced the primary dealer and satellite dealer systems, creating designated market makers whose role was to deepen liquidity and improve market functioning.

The primary dealer (PD) system began in the United States in 1960 and has since been adopted, with local variations, by a number of countries including Argentina, Brazil, Canada, France, Hungary, Italy, Korea, Mexico, Singapore, Thailand and the United Kingdom. In those markets PDs typically play three linked roles: they participate actively in the primary issuance of government securities, act as market makers in the secondary market by quoting two-way prices and providing liquidity, and supply market intelligence to the central bank. Not all advanced markets have embraced the PD model; for example, Australia, Germany and New Zealand have not set up formal PD networks.

India introduced a PD system in 1996 to strengthen market infrastructure, deepen the government securities market and support the government’s borrowing programme. The policy aimed to improve secondary-market trading, increase liquidity and turnover in government bonds, broaden voluntary holdings of government securities among investors, and create an efficient channel for the Reserve Bank’s open market operations (OMOs). Rather than simply holding inventory, PDs were expected to be active market makers—providing continuous two-way quotes to ensure liquidity and to support primary market operations—so that, over time, market-making responsibilities could shift from the RBI to a competitive PD network.

Eligibility for PD status was drawn to include a range of institutional players: subsidiaries of scheduled commercial banks, subsidiaries of all‑India financial institutions, companies incorporated under the Companies Act with a primary focus on the government securities market, and subsidiaries of foreign banks or securities firms. To promote stability and resilience, PDs must maintain prescribed minimum net owned funds (NOF) and deploy a specified amount in government securities on a daily basis; these capital thresholds have been raised over time in line with market and supervisory objectives. Entities that seek to expand into additional permitted activities are required to meet higher NOF standards.

Banks without a partly or wholly owned subsidiary may also undertake PD business, provided they meet stricter eligibility criteria set by the regulator. These include a higher minimum NOF, a minimum capital adequacy ratio (CRAR) of 9 per cent, net non‑performing assets below specified limits and a demonstrated record of profitability over the preceding three years. Such bank‑PDs are expected to earmark a minimum balance of government securities for PD operations and, unlike other PDs, do not receive separate access to the call‑money market or to the Liquidity Adjustment Facility (LAF).

As institutional entities, PDs are treated as non‑banking finance companies for regulatory purposes. They must be registered with and are regulated by the Reserve Bank of India, irrespective of whether they accept public deposits.

DFHI and STCI were accredited as primary dealers on 1 March 1996; a month later, on 1 June 1996, four more dealers—SBI Gilts, PNB Gilts, Gilts Securities Trading Corporation Limited and ICICI Securities—became operational. By 31 March 2016 the gilts market (government securities market) had 21 approved primary dealers (PDs). Of these, seven were non‑bank, stand‑alone PDs and the remaining 14 were banks carrying out PD business departmentally (bank PDs) and registered as NBFCs under Section 45‑IA of the RBI Act, 1934. The stand‑alone PDs at that date were Securities Trading Corporation of India Ltd, SBI DFHI Ltd., ICICI Securities Ltd., PNB Gilts Ltd., Morgan Stanley‑PD, Nomura FI Securities Ltd. and Goldman Sachs.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which bars the Reserve Bank of India from participating in primary auctions of government securities from April 1, 2006, shifted the onus of supporting these auctions to the network of Primary Dealers (PDs). To ensure an orderly and liquid market, PDs are expected to be active participants in both primary issuances and secondary-market trading, and the RBI has therefore placed a set of clear obligations on them.

At the primary market level, PDs must support government dated securities and Treasury Bill issuances in line with RBI-prescribed norms for underwriting commitments, bidding commitments and success ratios. In the secondary market they are required to make two-way prices—acting as market makers—through the Negotiated Dealing System-Order Matching (NDS-OM), over-the-counter trades and recognised stock exchanges, and to be willing to take principal positions to facilitate trading and liquidity.

PDs must also maintain adequate physical infrastructure and skilled personnel to participate efficiently in primary auctions, execute trades in the secondary market and to advise and educate investors. They are expected to operate robust internal control systems to ensure fair conduct of business, timely settlement of trades and accurate maintenance of accounts, and to grant RBI access to all records, books and documents as and when required.

On the balance-sheet side, a PD’s daily investment in government securities and Treasury Bills should be at least equal to its net call/notice/repo borrowing (including CBLO) plus net RBI borrowings (through LAF, intra-day liquidity or other liquidity support) plus the minimum prescribed Net Owned Funds (NOF). On an annual basis, PDs must achieve minimum turnover ratios in the secondary market: at least five times for government dated securities and ten times for Treasury Bills, calculated on average month-end holdings; for outright transactions specifically, the minimums are three times for dated securities and six times for Treasury Bills. (Turnover ratio is the ratio of total purchases and sales during the year in the secondary market to average month-end stocks.)

Finally, PDs are required to submit periodic returns to the RBI and to comply with any prudential and regulatory guidelines the RBI issues from time to time. These obligations together aim to preserve market integrity, deepen liquidity and ensure that government borrowing is absorbed efficiently.

To strengthen the government securities market and ensure Primary Dealers (PDs) meet their obligations, the Reserve Bank of India extends a range of operational and liquidity facilities to them. These privileges both integrate PDs into the market infrastructure and give them the tools needed to participate effectively in monetary and debt-management operations.

The facilities include access to a current account and a Subsidiary General Ledger (SGL) account with the RBI for holding government securities; permission to borrow and lend in the money market (including the call money market) and to trade in all money‑market instruments; membership of electronic dealing, trading and settlement systems such as the Negotiated Dealing System (NDS) platforms, INFINET, RTGS and CCIL; access to the Liquidity Adjustment Facility (LAF) for short-term liquidity management; liquidity support under a separate RBI‑notified scheme for standalone PDs; and favoured participation in the Reserve Bank’s open market operations. These facilities collectively strengthen PDs’ ability to provide market-making services and support orderly functioning of the government securities market.

Primary dealers (PDs) may obtain funds from the call, notice and term money markets as well as from the repo market, including instruments such as the Collateralised Borrowing and Lending Obligation (CBLO).

Borrowing by PDs from the call/notice market is permitted up to, on average over a reporting fortnight (a two‑week reporting period), 225 per cent of their net owned funds (NOF) measured as at 31 March of the preceding financial year. Conversely, PDs may lend in the call/notice market up to 25 per cent of their NOF, with this lending limit also assessed on an average basis over the reporting fortnight. Both the borrowing and lending limits are subject to periodic review by the Reserve Bank of India.

In addition to access to the Reserve Bank of India's Liquidity Adjustment Facility, stand‑alone Primary Dealers (PDs) are eligible for liquidity support from the RBI against specified government securities, including State Development Loans (SDLs). This support is allocated according to a clear formula that combines an equal share element with performance‑based components.

Half of the total liquidity support is distributed equally among all stand‑alone PDs. The remaining half is split 1:1 between primary‑market and secondary‑market performance. Primary‑market performance is measured by bids accepted in Treasury‑bill and government‑security auctions, weighted in the ratio 1:3 (T‑Bills : dated government securities). Secondary‑market performance is judged by outright turnover in T‑Bills and dated government securities, using the same 1:3 weighting.

Each PD’s individual limit of liquidity support is reviewed and revised every half‑year — for the April–September and October–March periods — based on that PD’s market performance over the preceding six months. Liquidity support is provided at the RBI’s announced Repo rate and must be repaid within 90 days. Any amount outstanding beyond 90 days attracts a penal interest rate equal to the Bank rate plus 5 percentage points for the period beyond 90 days.

Inter-corporate deposits (ICDs) may be used by primary dealers (PDs) only sparingly and must not serve as a continuous source of funding. After careful assessment of the attendant risks, the board of directors of the PD should adopt a clear policy on ICDs that sets out the governing principles.

This policy should, among other things, state that the aggregate ICD borrowings shall under no circumstances exceed 50 per cent of the PD’s Net Owned Funds (NOF) as at the end of March of the preceding financial year, although actual reliance is expected to be well below this ceiling. ICDs accepted by PDs should have a minimum tenor of one week. Any ICDs taken from a parent, promoter, group company or other related party must be on an arm’s‑length basis and disclosed in the financial statements as related‑party transactions. Funds raised through ICDs must be managed in accordance with the firm’s asset‑liability management (ALM) framework.

Separately, PDs are prohibited from placing funds in the ICD market.

Primary Dealers (PDs) may raise FCNR(B) loans up to a limit of 25 per cent of their Net Owned Funds (NOF), calculated as at the end of March of the preceding financial year. Such foreign‑currency borrowings must have their exchange‑rate risk hedged at all times for at least 50 per cent of the exposure.

PDs are not permitted to raise funds through External Commercial Borrowings (ECBs).

Primary Dealers are now permitted to issue subordinated Tier II and Tier III bonds; the coupon rate on these instruments is to be determined by the issuing firm’s Board of Directors.

Primary Dealers (PDs) are required to actively support the government securities market by participating in primary issues of dated securities of both the Central and State governments, as well as in Central Government Treasury Bills. This support is provided through underwriting commitments and active bidding in auctions, and by meeting the prescribed success ratios for such participation. Detailed guidelines specify the nature of these underwriting and bidding obligations and the success benchmarks PDs must maintain.

The underwriting of dated central government securities for Primary Dealers (PDs) is organised in two parts: a mandatory, evenly apportioned portion called the Minimum Underwriting Commitment (MUC) and a competitively allocated remainder called the Additional Competitive Underwriting (ACU). The MUC is calibrated so that at least 50 per cent of the notified amount of each issue is underwritten equally by all PDs, with each PD’s share being uniform regardless of its size or capital. The balance of the notified amount is placed for underwriting through an ACU auction.

The Reserve Bank announces, for every issue, the MUC per PD and the amount to be covered through the ACU auction. In the ACU, each PD must bid for at least the amount equal to its MUC share, but no PD may bid for more than 30 per cent of the notified amount. The ACU may be conducted on a uniform-price or multiple-price basis depending on market conditions; the chosen format is disclosed ahead of the auction. PDs submit bids within the stipulated window, indicating both the amount they are willing to underwrite and the underwriting commission rates; multiple bids by a PD are permitted. Based on the responses, the RBI determines the cut-off commission rates and communicates the results to PDs.

Underwriting commission is paid to successful ACU bidders according to the auction outcome. For commission on the MUC portion, PDs that win ACU underwriting amounting to 4 per cent or more of the notified issue receive commission on their MUC at the weighted average of all accepted ACU bids. PDs with ACU success below 4 per cent receive commission on their MUC at the weighted average of the three lowest accepted ACU bids. In Government of India securities auctions, a PD’s bid must be at least equal to its total underwriting obligation; where more than one issue is floated on the same day, this minimum bid requirement applies separately to each issue.

Commission is paid on the amount accepted for underwriting by the RBI, regardless of whether devolvement occurs, and is credited to the PDs’ current accounts at RBI, Fort, Mumbai, on the date of issue. In the event of devolvement — that is, when unsold securities are allocated to underwriters — PDs are allowed to set off their successful ACU bids against their underwriting commitment accepted by the RBI. Any devolvement on PDs is effected on a pro‑rata basis according to each PD’s underwriting obligation after such set‑offs. The RBI also retains the discretion to accept underwriting up to 100 per cent of the notified amount or to reject all underwriting bids without assigning a reason. An illustrative example of the underwriting procedure is provided in Annexure III.

When the Reserve Bank of India announces an auction of dated securities issued by state governments, it may invite Primary Dealers (PDs) to collectively underwrite up to 100 per cent of the notified amount of State Development Loans (SDL). A single PD may offer to underwrite up to 30 per cent of the notified amount for any one issue; if two or more issues are floated on the same day, the 30 per cent limit applies separately to each issue.

PDs must submit underwriting bids within the stipulated time, stating both the amount they are willing to underwrite and the underwriting commission rate; a PD may submit multiple underwriting bids. Based on the bids received, the RBI will determine the cut‑off commission and the underwriting amount it will accept, and will inform the PDs of that decision. The RBI also reserves the right to accept any amount of underwriting up to 100 per cent of the notified amount or to reject all underwriting bids without assigning any reason.

If devolvement occurs (that is, if unsubscribed securities are transferred to underwriters), PDs may set off the amounts they have successfully secured in the auction against their underwriting commitments accepted by the RBI. Any devolved securities will be allocated among PDs on a pro rata basis according to their net underwriting obligations after such set‑offs.

Underwriting commission is payable on the amount accepted by the RBI for underwriting, irrespective of the actual extent of devolvement. The commission is credited to the PDs’ current accounts at the RBI, Fort, Mumbai, on the date the security is issued.

At the start of each financial year every Primary Dealer (PD) must commit to submit bids equal to a fixed percentage of the notified amount of Treasury Bills at each auction. The Reserve Bank of India determines the minimum bidding commitment for each PD in consultation with that PD, taking into account factors such as the PD’s net owned funds (NOF), the offer made, its track record and past adherence to prescribed success ratios. Once fixed, this minimum commitment remains unchanged for the whole financial year or until the conclusion of the agreement on bidding commitments for the next financial year, whichever is later.

If a PD fails to submit the required minimum bid or bids for an amount smaller than its commitment, the Reserve Bank may take appropriate action. In addition, each PD must achieve a minimum success ratio of 40 percent of its bidding commitment in Treasury Bill auctions. This success ratio is monitored on a half‑yearly basis, and the PD is required to meet the 40 percent threshold separately in each half year (April–September and October–March).

Primary dealers are permitted to undertake a range of market operations: “When Issued” transactions in government securities, sale of securities allotted in primary issues on the same day, and short sales in Central Government dated securities. Beyond these transactions, PDs are expected to play an active role in providing liquidity to the government securities market and in promoting retail participation. They may distribute government securities to all categories of investors by placing and picking up orders on exchanges.

For settlement and custody, PDs may open demat accounts with a Depository Participant (DP) of NSDL or CDSL in addition to maintaining accounts with the Reserve Bank. The Public Debt Office, Mumbai (PDO‑Mumbai) enables value‑free transfers of securities between SGL/CSGL accounts and demat accounts, subject to guidelines issued by the Reserve Bank’s Department of Government and Bank Accounts (DGBA).

Primary dealers (PDs) suffered a substantial loss of Rs. 3,700 crore in 2004–05 following a sharp rise in interest rates and yields. In response, the Reserve Bank permitted PDs, from July 4, 2006, to diversify their activities beyond dealing in government securities, subject to a set of prudential conditions designed to contain risk and preserve the core public debt market role of PDs.

One key condition was a higher capital threshold for those wishing to diversify: PDs proposing to expand their businesses were required to have minimum Net Owned Funds (NOF) of Rs. 250 crore, compared with Rs. 50 crore for PDs that did not seek diversification. Eligible PDs were expected to bifurcate their operations into core and non‑core activities. Core activities were to remain centred on fixed‑income markets and related services — dealing in government securities and interest‑rate derivatives; trading in security receipts issued by securitisation and reconstruction companies; dealing in asset‑backed securities (ABS) and mortgage‑backed securities (MBS); transactions in other fixed‑income instruments such as commercial paper and certificates of deposit; underwriting and dealing in corporate/PSU/FI bonds and debentures; lending in the call, notice, term, repo and CBLO markets; and broking in government securities. Non‑core activities were permitted only within limits and included investment or trading in equity and equity‑oriented mutual fund units, advisory services, merchant banking and specified distribution activities such as clearing, mutual fund distribution and insurance distribution. PDs were expressly prohibited from broking in equity and from trading or broking in commodities, gold and foreign exchange. To ensure continued focus on public debt, every PD had to maintain at least 50 per cent of its total financial investments (long‑term and short‑term) in government securities at all times.

Exposure to non‑core activities was to be subject to explicit risk allocation. PDs could compute the capital charge for market risk on equity positions or units of equity‑oriented mutual funds using internal, value‑at‑risk (VaR)‑based models in line with Reserve Bank guidelines; however, the capital charge thus calculated could not exceed 20 per cent of the PD’s NOF as shown in the most recent audited balance sheet.

The Reserve Bank did not allow PDs to establish step‑down subsidiaries. Where step‑down subsidiaries already existed, PDs were required to restructure ownership so that the subsidiaries were held directly by the ultimate holding company or, if the PD itself was the holding company, to transfer the PD business to the step‑down subsidiary while the holding entity pursued activities not permitted for PDs. Such restructuring was to be completed within six months.

Finally, the Reserve Bank allowed PDs the option of merging with the bank that promoted them. Bank‑sponsored PDs had to meet the same eligibility criteria and obligations as stand‑alone PDs, and were subject to additional prudential norms: the bank’s capital adequacy requirements applied to the PD business; government securities held under the PD business were to be reckoned for the statutory liquidity ratio (SLR); and the valuation rules that apply to a bank’s “held for trading” portfolio were to be followed for the government securities earmarked to the PD business.

Primary dealers (PDs) must adopt Board‑approved investment and operational policy guidelines for securities transactions and ensure these are implemented consistently. Such guidelines should strictly follow instructions issued by the Reserve Bank of India (RBI) and their effectiveness should be reviewed periodically.

PDs are required to hold their government securities portfolio in the SGL maintained with the RBI; they may also maintain dematerialized accounts with depositories (NSDL/CDSL). All purchases and sales of government securities must be executed through SGL/CSGL or dematerialized accounts. Other investments—such as commercial paper, bonds, debentures (whether privately placed or otherwise), and equity instruments—must be held only in dematerialized form.

Any problem exposure that is unsecured or backed by security of doubtful value must be fully provided for. Where a PD has initiated legal action for recovery, such exposures should be assessed and provisions made to the satisfaction of the statutory auditors. Similarly, any claim against the PD should be identified and appropriately provided for.

The profit and loss account must transparently reflect any problem exposures and the impact of portfolio valuation in accordance with RBI instructions. The statutory auditors’ report should include a certification to this effect.

In March 2004 the Reserve Bank of India issued guidelines governing how primary dealers (PDs) may invest in non‑SLR debt securities. By non‑SLR the RBI means debt instruments that do not count towards a bank’s Statutory Liquidity Ratio. The instructions cover PDs’ investments in a broad range of non‑government debt — for example, capital gains bonds, bonds eligible for priority sector classification, bonds issued by Central and State public sector undertakings (with or without government guarantees), and debt issued by banks, financial companies, corporates, financial institutions, state‑ or central‑sponsored bodies, special purpose vehicles (SPVs) and similar issuers. The rules apply to purchases in both the primary and secondary markets.

Certain instruments are excluded from these norms: units of equity‑oriented mutual fund schemes (where the scheme may invest in equity), venture capital funds, commercial paper, certificates of deposit, and direct investments in equity shares. The RBI also exempted mutual fund schemes that invest their entire corpus in debt securities from the restrictions applicable to PDs. As for limits and prudential requirements, PDs’ holdings of unlisted non‑SLR securities are restricted to a maximum of 10 per cent of their portfolio; paper issued by securitisation and reconstruction companies and securitised debt such as asset‑backed securities (ABS) and mortgage‑backed securities (MBS) are included within this 10 per cent ceiling. PDs are not permitted to invest in non‑SLR papers with an original maturity below one year, except for commercial paper and certificates of deposit, and they are barred from investing in un‑rated non‑SLR bonds. Finally, PDs must report their secondary‑market, over‑the‑counter transactions in corporate bonds on the FIMMDA reporting platform.

Primary Dealers (PDs) were placed under the oversight of the Board for Financial Supervision (BFS) in 2002–03 because of their growing systemic importance. Their relevance arose from several interlinked features: a large number of entities operating as PDs, highly leveraged portfolios funded largely with short‑term resources, a substantial share in the government securities market, and a prominent role in the money market comparable to that of banks. In view of these risks and linkages, the Reserve Bank of India combines on‑site inspections of each PD with ongoing off‑site supervision based on prescribed periodic returns.

Off‑site surveillance of PDs relies principally on three regular returns: PDR I, PDR II and PDR III. PDR I is a daily statement of sources and uses of funds used to track call borrowings, RBI liquidity support, leverage and portfolio duration; it has been revised to capture more detail on specific funding lines such as inter‑corporate deposits (ICDs) and commercial paper (CP). PDR II is a monthly return used to monitor bidding commitments, success ratios, underwriting performance and secondary market turnover. PDR III, submitted quarterly, is designed to assess capital adequacy. In addition to these, the RBI may call for supplementary information when necessary, and the Asset–Liability Management (ALM) guidelines for NBFCs—adapted where appropriate—have been applied to PDs. A fourth quarterly return, PDR IV, was introduced from the quarter ended March 31, 2004, to capture selected balance‑sheet and profit‑and‑loss indicators.

Standalone Primary Dealers (Reserve Bank) Directions, 2016

These directions apply to all Standalone Primary Dealers (SPDs) that are registered as non-banking financial companies (NBFCs) with the Bank.

For the purposes of these directions, unless the context otherwise requires, the following definitions apply. "Act" means the Reserve Bank of India Act, 1934. "Bank" means the Reserve Bank of India constituted under section 3 of the Act.

"Subordinated Debt (SD)" refers to a fully paid-up, unsecured instrument that ranks below the claims of other creditors, contains no restrictive clauses, and cannot be redeemed at the initiative of the holder or without the Bank’s consent. SD instruments with an original maturity of less than five years, or a remaining maturity of less than one year, are not eligible to be included in Tier-II capital. Eligible SD will be limited to 50 per cent of Tier-I capital and must be issued in accordance with the Bank’s guidelines on subordinated debt (Tier‑II capital). For the purpose of calculating their contribution to capital, SD instruments are subject to a progressive discount based on residual maturity: less than one year — 100% discount; one year to less than two years — 80%; two years to less than three years — 60%; three years to less than four years — 40%; and four years to less than five years — 20%.

"Tier‑I capital" comprises paid-up capital, statutory reserves and other disclosed, free reserves. The following items are to be deducted from Tier‑I capital: investments in subsidiaries (where applicable), intangible assets, losses for the current accounting period, deferred tax assets, and losses carried forward from prior periods. If an SPD has substantial interest or exposure (as defined for NBFCs) in the form of loans and advances to other group companies that are not related to normal business relationships, those amounts must also be deducted from Tier‑I capital.

"Tier‑II capital" includes undisclosed reserves and cumulative preference shares (except those that are compulsorily convertible into equity); the cumulative preference shares must be fully paid-up and must not allow redemption at the option of the holder. Revaluation reserves are admissible in Tier‑II but are to be discounted at 55 per cent. General provisions and loss reserves may be included up to a maximum of 1.25 per cent of total risk-weighted assets, provided they are not attributable to an actual diminution in value or a specific identifiable loss in any asset and are available to meet unexpected losses. Tier‑II also includes hybrid debt capital instruments that exhibit both equity and debt characteristics, and subordinated debt as described above.

Capital Adequacy Framework for SPDs

Capital funds consist of Tier-I and Tier-II capital. SPDs are required to maintain a minimum capital-to-risk-weighted-assets ratio (CRAR) of 15 percent at all times.

The detailed credit risk weights for on‑ and off‑balance sheet items and the methodology for computing credit risk weighted assets are set out in Annex‑II; the procedure for calculating the capital charge for market risk is in Annex‑III.

In terms of capital adequacy, the capital charge for credit risk and for market risk (as prescribed in Annex‑II and Annex‑III) must be maintained continuously. In determining eligible capital, an SPD must first compute its minimum capital requirement for credit risk and then its market risk requirement, so as to establish how much Tier‑I and Tier‑II capital is available to support market risk. Of the 15 percent capital charge for credit risk, at least half must be met by Tier‑I capital; consequently, Tier‑II capital available to meet the credit risk charge shall not exceed 100 percent of Tier‑I capital at any time. Subordinated debt counted as Tier‑II capital is further capped at 50 percent of Tier‑I capital, and the aggregate of Tier‑II capital shall not exceed 100 percent of Tier‑I capital. Eligible capital therefore equals the full amount of Tier‑I capital plus Tier‑II capital subject to these limits and after any applicable deductions.

The overall capital adequacy ratio links credit and market risk explicitly: the market risk capital charge is multiplied by 6.67 (i.e., the reciprocal of the minimum credit risk capital charge of 15 percent) and the resulting figure is added to the credit risk weighted assets. The numerator for the overall ratio is the SPD’s total capital funds (Tier‑I and Tier‑II after deductions).

Guidelines on diversification of SPD activities follow the operational guidelines for primary dealers. The capital charge for market risk measured by Value‑at‑Risk (VaR) — computed at a 99 percent confidence level, a 15‑day holding period and using a multiplier of 3.3 for specified activities — shall not exceed 20 percent of the Net Owned Fund (NOF) as shown in the last audited balance sheet. The activities covered are: investment/trading in equity and equity derivatives; investment in units of equity‑oriented mutual funds; underwriting public issues of equity; and participation in the currency futures market. SPDs must calculate the capital charge for market risk on stock positions, underlying stock positions, and units of equity‑oriented mutual funds using internal VaR‑based models.

Funding, Deployment and Activities of SPDs

Sources and application of funds for Securities Primary Dealers (SPDs) are tightly regulated to ensure liquidity, market stability and prudent risk-taking. SPDs may raise funds from a range of short-term and medium-term markets, subject to specified limits and governance requirements, and must deploy those funds primarily in government securities and other permitted instruments while observing capital and risk-allocation norms.

Sources of funds
SPDs may borrow in the interbank money markets — including call, notice and term markets — and through repo transactions (including CBLO, i.e. collateralised borrowing and lending obligations). They can also access inter-corporate deposits (ICDs), FCNR(B) loans, commercial paper and non-convertible debentures, and are eligible for liquidity support from the bank.

In the call/notice market, SPDs may, on average over a reporting fortnight (the two-week reporting period used for supervisory returns), borrow up to 225 per cent of their NOF (Net Owned Funds) as at the end of March of the preceding financial year, and may lend up to 25 per cent of their NOF on a similar average basis. These borrowing and lending limits are reviewed periodically by the bank.

Inter-corporate deposits may be raised according to funding needs but only under a board‑approved ICD policy that addresses associated risks. ICD borrowings must not exceed 150 per cent of NOF as at the end of March of the preceding year and must have a minimum maturity of one week. ICDs from parent, promoter, group companies or related parties must be on an arm’s‑length basis and disclosed as related‑party transactions. Funds raised through ICDs remain subject to asset‑liability management (ALM) discipline. SPDs are, however, prohibited from placing funds in the ICD market.

SPDs may avail FCNR(B) loans up to 25 per cent of NOF as at the end of March of the preceding financial year, provided at least 50 per cent of the foreign‑exchange exposure is hedged at all times. Raising funds through external commercial borrowings is not permitted.

SPDs may issue non‑convertible debentures (NCDs) of up to one year’s maturity without the requirement of a working‑capital limit with a bank. Issuance of commercial paper must follow the RBI’s guidelines for commercial paper.

Application of funds
SPDs are allowed to carry out specified core and non‑core activities. Those engaged only in core activities must maintain a minimum NOF of 2,150 crore; SPDs that also undertake non‑core activities must maintain at least 2,250 crore. The SPD’s investment pattern must demonstrate predominance of government securities: at all times at least 50 per cent of total financial investments (short and long term) must be in government securities. Eligible holdings counted towards this predominance include the SPD’s own stock, stock held with the bank under liquidity support/intra‑day liquidity/LAF, stock placed with the market for repo borrowings and government securities pledged with the CCIL.

On a daily basis, an SPD’s aggregate holdings of government securities (including T‑Bills and CMBs) and corporate bonds (up to 50 per cent of NOF) must be at least equal to the sum of its net call/notice/repo (including CBLO) borrowings, net RBI borrowing (through LAF/intra‑day liquidity/liquidity support), and the minimum prescribed NOF.

Permitted core activities include dealing and underwriting in government securities, dealing in interest rate derivatives, broking in government securities, dealing and underwriting in corporate/PSU/FI bonds and debentures, lending in call/notice/term/repo/CBLO markets, and investment in commercial papers, certificates of deposit, security receipts issued by securitisation/reconstruction companies, asset‑backed and mortgage‑backed securities, debt mutual funds (whose entire corpus is invested in debt securities), NCDs, and dealing in credit default swaps.

Non‑core activities are divided by capital intensity. Activities expected to consume capital include investment or trading in equity and equity derivatives, investments in equity‑oriented mutual funds, underwriting public equity issues and participation in currency futures markets. Less capital‑intensive services permitted as non‑core activities include professional clearing, portfolio management, issue management, merger & acquisition advisory, private equity management, project appraisal, loan syndication, debt restructuring, consultancy, and distribution of mutual fund units and insurance products.

Distribution of insurance products requires the SPD to apply, with auditor‑certified particulars, to the regional office of the Department of Non‑Banking Supervision where the SPD’s registered office is located; SPDs may undertake insurance agency business on a fee basis without risk participation and without prior bank approval, subject to eligibility conditions. Distribution of mutual fund products must comply with SEBI regulations and the relevant code of conduct. Where other regulators’ approvals are required for non‑core activities, SPDs must obtain them.

SPDs are expressly prohibited from broking in equity and from trading or broking in commodities, gold and foreign exchange. Exposure to non‑core activities must comply with the regulatory and prudential norms for diversification laid down in the directions, and SPDs choosing to diversify must internally define the scope of diversification, the organisational structure and reporting lines, and set board‑approved exposure and risk limits in their investment policy.

All exposures to core and non‑core activities are subject to allocation of risk capital for credit and market risk, consistent with supervisory requirements and prudent risk management.

PMS, Non-GSec and CDS Guidelines

SPDs may offer Portfolio Management Services (PMS) to clients under the SEBI scheme for PMS, but must observe strict safeguards to protect client interests and maintain market integrity. A clear, written mandate must be obtained from each PMS client and adhered to in practice; this mandate should ensure that the client fully understands risk disclosures, potential for losses, and all costs including fees and commissions. PMS is to be carried out entirely at the client’s risk—SPDs must not, either directly or indirectly, guarantee any return. Funds or securities placed by a client for portfolio management should normally remain under management for no less than one year. SPDs are prohibited from deploying portfolio funds into lending in call/notice/term money markets, bills rediscounting, badla financing, or lending to or placing funds with corporate or non-corporate bodies. Client-wise accounts and records must be maintained for all funds accepted and investments made, and clients should receive regular account statements. Investments and funds belonging to PMS clients must be segregated from each other and from the SPD’s own assets; wherever possible, clients’ transactions should be executed in the market and not internally offset, and any transactions between the SPD and a PMS client or between two PMS clients must be carried out strictly at market rates.

SPDs are also required to follow applicable guidelines on interest rate derivatives and Credit Default Swaps (CDS). Those SPDs that wish to act as market makers in CDS must meet minimum eligibility criteria: a minimum net owned funds of Rs. 500 crore, a minimum capital to risk-weighted assets ratio (CRAR) of 15 per cent, and robust risk‑management systems capable of addressing the variety of risks inherent in such trading.

On investments in non-government securities (non-G‑Sec), SPDs must follow the prescribed norms that apply to corporate bonds, priority-sector bonds, capital-gain bonds and similar instruments issued by corporates, banks, financial institutions, state or central government–sponsored institutions, and special-purpose vehicles. These rules do not apply to units of equity‑oriented mutual funds, venture capital funds, commercial paper (CP), certificates of deposit (CD) or equity share investments. The guidelines govern investments in both the primary and secondary markets. SPDs are permitted to become members of SEBI‑approved stock exchanges to undertake proprietary transactions in corporate bonds, subject to all SEBI regulations and exchange eligibility criteria. For liquidity and exposure management, SPDs may have a sub‑limit equal to 50 per cent of their net owned funds (NOF) for investment in corporate bonds; this sits within the overall permitted average fortnightly limit of 225 per cent of NOF as at the end of March of the preceding financial year for call/notice money market borrowing.

With respect to maturities, SPDs shall not invest in non‑G‑Sec with original maturities of less than one year, except as permitted for non-convertible debentures (NCDs), CPs and CDs under the master directions on money market instruments. SPDs may invest in NCDs with original maturities up to one year, including those issued by corporates and NBFCs, but investments in unlisted short‑term NCDs must not exceed 10 per cent of the SPD’s non‑G‑Sec portfolio on an ongoing basis. All investments in non‑G‑Sec require customary due diligence, and SPDs are not permitted to invest in unrated non‑G‑Sec. In line with SEBI requirements on corporate debt securities, fresh investments in non‑government debt should generally be made only in listed debt securities, except where specific exceptions have been permitted.

Exposure to unlisted non‑G‑Sec is capped at 10 per cent of the non‑G‑Sec portfolio on an ongoing basis; this 10 per cent limit includes investments in security receipts issued by securitisation or asset reconstruction companies as well as in asset‑backed securities (ABS) and mortgage‑backed securities (MBS). Any unlisted non‑government debt in which SPDs invest within these limits should meet the disclosure norms applicable to listed companies, as prescribed by SEBI.

Finally, trading and reporting norms for corporate debt and securitised instruments are stringent: except for spot transactions, trades in listed debt securities must be executed on the trading platform of a stock exchange. Entities regulated by the Reserve Bank must report their secondary‑market over‑the‑counter (OTC) trades in corporate bonds and securitised debt instruments within 15 minutes of the trade to any of the recognised stock exchanges (NSE, BSE or MCX‑SX). Such trades may be cleared and settled through recognised clearing corporations (NSCCL, ICCL or MCX‑SX CCL).

G‑Sec Exchange Trading and Primary Dealers

To broaden access to government securities (G-Secs), including retail participation, regulators permitted trading of dated G-Secs in dematerialised form on stock exchanges through an anonymous, order‑driven, screen‑based system similar to equities. Consequently, automated order‑driven trading in G‑Secs was enabled on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), the Over the Counter Exchange of India (OTCEI) and the MCX Stock Exchange. This facility operates alongside the negotiated dealing system (NDS); as a parallel platform, trades executed on exchanges are cleared by the exchanges’ respective clearing corporations or clearing houses.

Scheduled primary dealers (SPDs) are expected to be active liquidity providers and to promote retailing in the G‑Sec market by using exchange platforms to place and pick up orders. To participate fully, SPDs may open demat accounts with depository participants of NSDL/CDSL in addition to maintaining accounts with the Reserve Bank. The PDO‑Mumbai permits value‑free transfers between SGL/CSGL accounts and an SPD’s own demat account, subject to guidelines issued by the Department of Government and Bank Accounts (DGBA), RBI.

SPDs trading G‑Secs on stock exchanges must comply with several conditions. They need specific board approval to trade on exchanges and must transact on a delivery basis only. Brokers or trading members must not be part of the settlement process: trades must settle directly with the clearing corporation/clearing house (if the SPD is a clearing member) or through clearing member custodians. Transactions routed through any single broker remain subject to existing regulations governing brokered trades. A standardized T+1 settlement cycle applies to all outright secondary‑market G‑Sec transactions to allow more processing time and better funds and risk management; for repo transactions, participants may choose to settle the first leg on either T+0 or T+1 as per their needs. Settlement failures arising from non‑delivery of securities or non‑availability of clear funds will be treated as SGL bouncing, with applicable penalties, and exchanges will report such failures to the respective PDOs. SPDs that are trading members may be required to collect margins from their non‑institutional clients and must not pay margins on behalf of clients or create overnight credit exposure; they should also be mindful of intraday exposure risks. Finally, SPDs wishing to offer clearing or custodial services must obtain SEBI approval, and those seeking exchange trading membership must meet criteria set by SEBI and the exchanges.

Primary dealers organised themselves into an autonomous self‑regulatory body, the Primary Dealers Association of India (PDAI), in 1996 to promote a liquid debt market, set common standards for participants, integrate different market segments harmoniously and address legal, procedural and administrative bottlenecks. Banks and primary dealers together formed another SRO, the Fixed Income Money Market and Derivatives Association of India (FIMMDAI), in 1997. Both bodies have been proactive in shaping money‑ and government‑securities‑market developments and have played a central role in upgrading market infrastructure. Representatives of PDAI and FIMMDAI serve on the Reserve Bank’s Technical Advisory Group on Money and Government Securities Markets. FIMMDAI now publishes the debt‑market yield curve, has prepared standard procedures and documentation for the commercial paper and certificate of deposit markets, and is working on uniform documentation and accounting principles for the repo market.

In practice, primary dealers have often bid in excess of their primary‑market commitments and have produced significant secondary‑market turnover. Individually, PDs have met minimum annual turnover ratios—combined outright and repo—of about five times in dated G‑Secs and ten times in Treasury bills, with minimum annual outright‑only turnover targets of roughly three times for dated G‑Secs and six times for T‑bills. These metrics reflect the role PDs have played in supplying secondary‑market liquidity over the past two decades and the sharpening of their trading skills, which supported higher returns on assets. Falling long‑term interest rates, abundant liquidity, rising investor interest in government securities and a policy push for retail distribution have further aided turnover growth.

Regulatory measures have also influenced PD behaviour. On 26 July 2002 the RBI required PDs to publish their performance accounts and results in newspapers. To avoid potential conflicts of interest arising from ownership, the RBI divested its holdings in two primary dealers—Securities Trading Corporation of India and Discount and Finance House of India.

The market environment changed sharply in 2004–05 when G‑Sec yields rose by about 150 basis points. The end of the soft interest‑rate regime led to lower volumes, greater price volatility and reduced profitability, and many PDs posted losses. Compulsory bidding obligations and turnover requirements further strained profitability and contributed to a decline in the number of active PDs, reducing competition. To support the PD model, the RBI proposed giving PDs a degree of exclusivity in primary issuances through book‑building: under such a system, participants subscribing to an issue would go through the PD who manages the book, allowing the PD to observe price and quantity demand and to place more informed bids while earning alternative fee income. At the same time, structural trends—smaller fiscal deficits, rising G‑Sec yields and the spread of electronic trading and auctioning—are expected to reduce traditional business opportunities for PDs. To diversify revenue sources, the RBI has considered permitting PDs to invest in overseas sovereign bonds and to establish joint ventures or wholly owned subsidiaries abroad.

Because primary dealers have traditionally depended on trading government and corporate bonds for revenues, they have sought broader permissions from the RBI to operate in equities, interest‑rate futures, foreign exchange and commodities markets to reduce concentration risk and diversify income streams.

Primary Dealers: Achievements and Challenges

Primary dealers have played a central role in strengthening the government securities market: they helped build market infrastructure, raised liquidity and turnover in the secondary market, and became the dominant investors in primary issuances. The consolidation of the PD system also enabled the Reserve Bank of India to withdraw from the primary market with effect from April 1, 2006. Despite these achievements, several gaps remain and require focused attention from PDs collectively and through their association, the Primary Dealers Association of India.

A wider retail investor base is essential for deeper, more resilient markets. PDs and PDAI should take the lead in raising awareness of government securities among individual investors to develop a retail market that can contribute meaningfully to liquidity. Equally important is the fulfilment of basic market-making obligations: PDs must consistently offer two-way quotes to ensure continuous liquidity. Greater transparency in these market‑making operations will strengthen PDs’ credibility and make government securities more attractive to retail participants.

Regular, proactive communication with the RBI about market developments is also necessary; timely information from PDs will help the central bank judge when and how to intervene. On the balance-sheet side, PDs should shore up their capital bases to reduce reliance on call-money borrowings, thereby lowering their exposure to market volatility. The envisaged change in Stage II of LAP—where a portion of liquidity support will be available at market rates—underscores the need for careful business planning for future liquidity costs.

Improved risk management practices will raise the quality of returns and resilience to shocks. PDs should also expand their branch networks and extend operations beyond traditional centres to meet the investment needs of corporates and other large institutional investors. Overall, PDs need to be more proactive and business‑minded to sustain and deepen the market they helped create.

To widen organized dealing and distribution and to support primary dealers, the RBI introduced satellite dealers as a second tier in the trading and distribution structure. The guidelines for registering satellite dealers were announced on December 31, 1996: eligible applicants included subsidiaries of scheduled commercial banks and all‑India financial institutions, and companies incorporated under the Companies Act, 1956 with minimum net owned funds of Rs 25 crore. In line with those rules, the RBI approved 16 entities as satellite dealers.

Satellite dealers were allowed to raise resources through commercial paper and to avail themselves of RBI liquidity support and ready‑forward facilities; some satellite dealers later became primary dealers. The network was intended to promote retailing of government securities, but the performance of satellite dealers fell short of expectations. After consulting the Primary Dealers Association of India, the RBI decided to discontinue the system: no new satellite dealers would be licensed, and existing SDs were required to submit RBI‑satisfactory action plans for winding up their operations by May 31, 2002.

NDS and CCIL: Trading and Settlement

To strengthen trading, settlement and risk management in the money market and the government securities market, the Negotiated Dealing System (NDS) and the Clearing Corporation of India Limited (CCIL) were established. The NDS provides an electronic platform for inter-bank and market-wide transactions and price discovery, while CCIL acts as a central counterparty that manages clearing and settlement, thereby improving transparency and reducing counterparty and settlement risks.

The Reserve Bank introduced the Negotiated Dealing System (NDS) to reform the secondary market for government securities and money market operations by improving transparency and enabling electronic bidding in auctions. Test runs began in November 2001 and Phase I became operational on 15 February 2002 with 41 participants. The system was intended to modernize dealing, reporting and the dissemination of trade information with minimal time lag.

The NDS provides an online facility for electronic bidding in primary auctions of central and state government securities, as well as for Open Market Operations (OMOs) and the Liquidity Adjustment Facility (LAF). It supports screen-based dealing and the reporting of transactions in money market instruments — including repos — and in secondary market trades in government securities, thereby making market information widely and promptly available to participants.

Operationally, the NDS is integrated with the securities settlement system (SSS) of the Public Debt Office and with the Clearing Corporation of India Ltd (CCIL) to enable paperless settlement of government securities and treasury bills. Trades executed or reported on the NDS can be settled either through CCIL or directly through the Reserve Bank’s SGL (Subsidiary General Ledger) accounts. Settlement through CCIL follows the DVP‑II mechanism: securities are settled on a gross, trade‑by‑trade basis while funds are settled on a net basis.

Eligibility for NDS membership includes banks, primary dealers and financial institutions that maintain SGL accounts and current accounts with the Reserve Bank. The platform supports both computer‑matching and a chat mode for negotiating deals within the system, and members are required to report trades negotiated outside the system for settlement. NDS also facilitates participation in primary auctions by allowing bids from members’ own terminals or from pooled terminals provided at regional offices for SGL account holders without member terminals. The Reserve Bank uses the NDS to extend the LAF, and entities with SGL accounts were asked to join the NDS by 31 May 2002; by 5 August 2002, 138 SGL account holders had become members. For the quarter ended June 2002, an average of 526 deals were reported daily on the NDS, of which 473 deals valued at 711,688 crore were ready for settlement. These comprised money market deals (109 deals for 8,762 crore), outright government securities trades (344 deals for 22,080 crore) and repo transactions among members. Settlement through CCIL accounted for 91.3% of government securities trades dealt or reported on the NDS.

To complement the voice‑based repo market, the Reserve Bank planned an electronic trading platform specifically for repos in government securities. In addition, because earlier negotiated and quote‑driven trading facilities were underused, the Reserve Bank launched a new anonymous order‑matching venue on the NDS — the NDS‑OM (NDS—Order Matching System) — on 1 August 2005. NDS‑OM lets buyers and sellers place anonymous quotes; transactions are executed by matching those quotes. Initially only banks and primary dealers could trade on NDS‑OM; subsequently, mutual funds that were NDS members and large pension/provident funds (for example the Central Board of Trustees and certain sectoral funds) as well as insurance companies were permitted access by opening temporary current/SGL accounts with the Reserve Bank. Primary dealers often execute trades on behalf of non‑bank participants, a development that has reduced the role of traditional brokers. NDS‑OM also supports odd‑lot trading, trading of new securities in the when‑issued market, and trading of Central SGL (CSGL) entities, and it has become the preferred trading mode in the government securities market, accounting for about 60% of activity.

Overall, the NDS has materially improved the functioning of secondary markets by raising transparency, enabling screen‑based trading and on‑line trade reporting, and by speeding dissemination of real‑time price information. These features have helped market participants execute trades more efficiently and have strengthened market infrastructure for government securities and related instruments.

The Clearing Corporation of India Limited (CCIL) was incorporated on 30 April 2001 under the Companies Act, 1956. Promoted principally by the State Bank of India along with other banks, financial institutions and primary dealers, it was established as a limited‑liability, non‑government company with an equity capital of ₹250 crore and operates as a commercial entity subject to corporate tax on its profits.

CCIL functions as the central counterparty for settlement of trades in government securities, treasury bills, money‑market instruments, repos, inter‑bank foreign‑exchange deals and derivatives whose underlying is a security or money‑market instrument. It clears and settles trades executed by institutional participants — banks, DFIs, primary dealers, mutual funds, corporates and NBFCs — which account for more than 98 per cent of the market. Through its wholly owned subsidiary, ClearCorp Dealing Systems (India) Ltd., CCIL also operates market platforms: the inter‑bank forex platform FX‑CLEAR (launched 7 August 2003), the anonymous government‑securities trading platform NDS‑OM (August 2005), and the screen‑based quote‑driven dealing system NDS‑CALL for call, notice and term money (launched 18 September 2006).

Trades concluded on the Reserve Bank’s Negotiated Dealing System (NDS) are settled by CCIL over INFINET. As central counterparty, CCIL assumes the risk of a member defaulting on obligations and manages this exposure through a margining framework: initial margin to cover possible future adverse price movements, mark‑to‑market (MTM) margin to cover notional losses already incurred, and, where applicable, volatility margin. In addition, CCIL operates a Settlement Guarantee Fund (SGF) to which members contribute, providing an additional layer of protection against member defaults.

In the securities segment, settlement has been migrated to DVP III mode, with netting of both funds and securities. This arrangement facilitates the rollover of repos, allows participants to buy and sell the same security on the same day subject to RBI rules, and reduces the risk of failed trades arising from counterparty defaults. As central counterparty, CCIL thus absorbs and mutualizes counterparty risk for its members.

For foreign‑exchange transactions CCIL novates each eligible contract, replacing the original bilateral contract with two contracts — one between CCIL and each counterparty. The rupee leg is settled through the member’s current account with the RBI, while the US dollar leg is settled through CCIL’s accounts with designated settlement banks in New York. This centralized settlement mechanism has reduced gross dollar funding requirements by more than 90 per cent.

CCIL manages credit and market risk, liquidity risk and operational risk through a combination of margining, guarantee funds and liquidity lines. Securities segment risk is addressed by initial and MTM margins and by requiring members to maintain adequate levels in the SGF, which may consist of eligible government securities/treasury bills and a minimum of 10 per cent cash. In the forex segment, CCIL employs loss‑allocation mechanisms and limits membership to authorised dealers to contain credit and market exposures. To ensure liquidity for uninterrupted settlement, CCIL maintains rupee securities via member contributions to the SGF, rupee funds through lines of credit with banks, and US‑dollar funds through fully collateralized lines of credit with settlement banks. From 20 October 2008, CCIL began offering guaranteed settlement for forex forward trades from the trade date.

To mitigate operational risk, CCIL is progressively automating trade processing and has established a disaster‑recovery site at the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad, to ensure business continuity.

CCIL clears all government‑securities and repo transactions reported on the RBI’s NDS as well as rupee/USD free spot and forward deals. All repo transactions are required to be routed through CCIL; outright transactions up to ₹20 crore must be settled through CCIL, and government‑securities trades up to ₹220 crore are compulsorily settled by CCIL. Because most transactions fall below these thresholds, more than 80 per cent of government‑securities trades are routed through CCIL. These mandates are intended to protect retail investors from counterparty risk and to encourage wider retail participation; for larger transactions market participants may choose settlement through CCIL or directly via the RBI’s SGL system.

The RBI has also directed banks to report and settle all spot transactions in listed and unlisted non‑SLR securities on the NDS, a move that is expected to enhance transparency in the non‑SLR segment. CCIL’s guarantee to non‑SLR trades further reduces default risk in that market.

As of 31 March 2009, CCIL had 153 active members in its securities clearing and settlement operations, and the size of its guarantee fund stood at ₹4,380.64 crore. CCIL’s reported turnover in the government‑securities segment rose from ₹26,92,129 crore in 2004–05 to ₹62,54,579 crore in 2008–09, and aggregate clearing and settlement across securities, forex and CBLO amounted to ₹3,20,16,852 crore in 2008–09. Growth in turnover was supported by regulatory limits on call money borrowings, greater activity in the repo market and an overall upswing in the securities market.

Looking ahead, CCIL proposes to introduce a screen‑based Repo Dealing System to facilitate basket repos — which group underlying securities into baskets by instrument category, liquidity and maturity profile — and special repos that allow counterparties to specify the exact security to be borrowed or lent. It is also developing a trading platform and guaranteed‑settlement infrastructure for the IRS/FPRA market.

Because of its critical role in clearing and settlement for inter‑institutional government‑securities and inter‑bank forex transactions, CCIL has been recognised as a systemically important payment system (SIPS).

Evolution and Reforms of Government Securities Market

Reforms in the government securities market have strengthened the Reserve Bank of India’s operational autonomy and reshaped how the central government borrows. Ending automatic monetization through ad‑hoc treasury bills and introducing Ways and Means Advances (WMA) reduced ad hoc accommodation and compelled the government to borrow more consistently from the market at market rates. That shift, together with an increased emphasis by the RBI on treasury management and interest‑rate risk, lowered devolvement pressures on the RBI and primary dealers and encouraged greater market absorption of government paper.

At the same time, the repertoire of instruments and the market microstructure were substantially expanded. New instruments—such as floating rate bonds, capital‑indexed bonds and treasury bills of varying maturities—offered investors more choices, while operational changes including yield‑ and price‑based auctions, tap issues, pre‑announced notified amounts, non‑competitive bidding outside notified amounts, re‑issuance of dated securities, a published treasury bill calendar and adoption of delivery‑versus‑payment (DVP) arrangements broadened and deepened the market. These reforms improved price discovery and made primary issuance and secondary trading more efficient.

Institutional infrastructure also improved markedly. The system of Primary Dealers strengthened intermediation, while electronic initiatives—most notably the Negotiated Dealing System (NDS) and the establishment of the Clearing Corporation of India Ltd. (CCIL)—enhanced trading transparency, settlement safety and market integrity. Regular publication of Subsidiary General Ledger (SGL) data and greater reporting of government‑securities trades on platforms such as the NSE’s wholesale debt market screen further increased transparency and allowed market participants and policymakers to monitor flows more closely.

The secondary market matured alongside these changes. Trading volumes rose and repo transactions came to dominate aggregate turnover, reflecting the market’s increased depth and the emergence of an active short‑term financing segment. Consolidation measures—principally re‑issuance of existing loans—reduced the number of separate floating stocks and improved liquidity in outstanding securities. To manage redemption pressures and rollover risk proactively, the RBI has also used buybacks and switches, thereby moderating gross borrowing needs.

Reforms sharpened the RBI’s toolkit for liquidity and interest‑rate management. Open market operations and repos became important instruments to neutralize excess liquidity and to contain wide swings in the domestic money and foreign exchange markets. During periods of heavy borrowing, the RBI has employed a mix of direct devolvement, private placements and open market operations to help soften medium‑ and long‑term yields. The auction system itself has contributed to market development by fostering bidding skills among investors, while retail participation has been promoted through non‑competitive bidding facilities.

Finally, a supportive institutional ecosystem emerged with self‑regulatory bodies such as the Primary Dealers Association of India and the Fixed Income Money Markets and Derivatives Association (FIMMDA). The market has also adapted to the needs of long‑term investors: for example, a 40‑year government security was issued in 2015–16 to cater to insurance companies and pension funds seeking longer duration instruments. Together, these reforms have transformed the government securities market into a more transparent, liquid and resilient segment of India’s financial system.

Size and Integration of India's Financial Markets

Table 10.1 shows that India’s financial markets are dominated by the money market, which accounts for roughly 80 percent of total average daily turnover. The government securities market is the next largest segment, followed by the equity market. All three segments have expanded in the post‑reform period, reflecting broader structural changes in the financial system.

One central aim of those reforms was to promote greater integration across market segments. While progress has been made in linking the money market, government securities market and equity market, these connections remain shallow in places; they need to be further widened and deepened to enable smoother interaction with global financial markets.

Post-Reform Debt Market Expansion

Activity in the debt market has risen markedly since the post‑reform period, with especially strong growth in the government securities segment. The Reserve Bank of India has played a pivotal role in developing this market, enhancing its depth and liquidity. Sluggish conditions in equity markets have prompted many investors to shift toward debt instruments, boosting trading not only in government securities but also in corporate debt; consequently, the entire debt market has seen a sustained upsurge in turnover.