An Overview Of The Indian Debt Market

12 min read • Updated 20 September 2023
Written by Chandhana Padma
An Overview of the Indian Debt Market

The financial market in India is significantly large and encompasses a host of instruments and securities in which one can invest. The market can broadly be classified into Money Market & Capital Market, with equity and debt market being the primary constituents of the latter.

While the equity market includes volatile and relatively riskier securities that do not have guaranteed returns, the debt market has fixed-income securities that deliver the promised interest rates, at significantly lower risk levels.

Risk-averse investors and investors looking to diversify their investment portfolios can invest in the debt market for secured returns. 

What is the Debt Market?

The debt market in India is the financial marketplace where all debt instruments are bought and sold. When we speak of debt instruments, we mean those securities that offer a fixed rate of return on your investment and repayment of the principal amount. Consider the example of fixed deposits that give guaranteed investment returns and are a part of the debt market.

Thus, you can receive a secure income even in volatile markets when you invest in the debt market.

What are debt instruments and who issues them?

Debt instruments in India are securities that are traded in the debt market. When an entity needs funds, it can issue a debt instrument to borrow money from interested investors. The entity is called the issuer and the investor is referred to as the lender.

The issuer pays the interest rate to the investor at periodic intervals, in exchange for borrowing the funds. Thus, debt instruments carry a fixed interest rate.

Different types of entities can issue debt instruments in India to raise funds. These entities include the following:

  • Central and State Governments
  • Corporate bodies, i.e., companies
  • Public sector companies, or PSUs
  • Banks
  • Non-Banking Financial Companies (NBFCs)
  • Financial Institutions
  • Government agencies or statutory bodies

Also Read: Key Differences between the Primary Market and Secondary Market

Types of debt market instruments

As mentioned earlier, different debt market instruments are available to you for investment purposes. Some of the most common and popular ones are as follows:

1. Bonds

Bonds are debt instruments issued by entities to raise funds to finance their projects, operations and growth plans. Corporations, governments, institutions, and even municipalities can issue bonds.

Bonds are of the following types:

  • Fixed-interest bonds carry a fixed interest rate 
  • Floating interest bonds carry a fixed “spread” and a fluctuating interest rate component that is subject to changes in benchmark rate. So this floating component is reset at regular intervals. 
  • Zero coupon bonds are issued at a discounted rate and redeemed at their par value.  They don’t offer interest payments at regular intervals. 
  • Government bonds are nearly risk-free investment avenues issued by government bodies.
  • Corporate bonds are issued by public and private companies for financing an array of business purposes
  • Tax-free bonds are generally issued by a government enterprise and offer a tax advantage to investors

The bond market in India assumes two distinct forms—primary market and secondary market. As the Primary market in India is the Dealer Market, the ticket sizes of bonds are exorbitantly leading to minimal opportunities for retail investors. Only institutions and wholesalers participate in it. Whereas, the secondary market facilitates the trading of bonds bought in the primary market. 

There are certain corporate bonds that come with ‘call options’ and/or ‘put options’. Under the call option, the issuer company has the right to call back/buy back the bond once a specified period has elapsed. In the put option, you have the right to sell the bond back to the company in exchange for money.

Also Read: Understanding NSC- National Savings Certificates

2. Fixed Deposits

Fixed deposits are quite a popular mode of investment for many people. They are offered by banks, NBFCs, and even post offices. Under the fixed deposit scheme, you can invest a lump sum with the financial institution. You can also choose the term of deposit, i.e., for how long you want to stay invested.
The financial institution, in turn, offers a guaranteed rate of interest on the deposit based on the term selected.
Some features of fixed deposits are as follows: 

  • The term of the investment  ranges from 7 days to 10 years
  • You can start a fixed deposit account with as little as Rs. 1000, and make investments in multiples of 100. 
  • The interest might be paid annually, quarterly, half-yearly or even monthly
  • You can opt for a cumulative deposit scheme or a non-cumulative one.
    Under the former, the interest income gets reinvested, and you get a lump sum on maturity.
    With the latter, the interest income is paid as and when earned. On maturity, you get the amount that you deposited.
  • Banks and post offices issue 5-year fixed deposits. Investment in such schemes earns you a deduction under Section 80C of the Income Tax Act, 1961, and the maximum deduction you can claim is Rs.1.5 lakhs.
  • Interest earned from fixed deposits is taxable if you are not a senior citizen, i.e., aged 60 and above. The interest income gets taxed as per your income slab rates.
  • Senior citizens enjoy an additional interest rate on their deposits as well. Moreover, the interest income that they earn is also tax-free up to a ceiling of Rs. 50,000 under Section 80TTB
  • An additional advantage of bank fixed deposits is that your deposit amount is insured for up to Rs. 5 lakhs. So, your principal would not be lost even if the bank goes into liquidation!

3. National Savings Certificate

The National Savings Certificate, or NSC, as it is popularly called, is offered by the post office and offers tax benefits.

The minimum investment amount is Rs. 1000 and the minimum deposit period is five years. But you can stay invested for a longer tenure as well. For the quarter ending September 30, 2022, the interest rate offered on NSC is 6.8% per annum. Further, the investment amount qualifies for a deduction under Section 80C. You can get a deduction of up to Rs. 1.5 lakh on your NSC investments. The interest you earn on your NSC investment is compounded and reinvested by default.

4. Debentures

Like bonds, debentures are also a mode of raising funds. However, debentures are different from bonds because only companies issue them.

Corporate houses can issue debentures to borrow money from investors. Debentures have a face value, and you can buy them as units. For example, if a debenture has a face value of Rs.100 and you invest Rs.1000, you get ten debenture units.

Fixed interest is paid to the investor of the debenture. The company can redeem the debenture at a discount or at a premium. While a discounted amount is lower than the face value, the premium amount is higher than the face value. The company can also redeem the debenture at the face value.

There are different types of debentures that a company can issue, like convertible and non-convertible debentures.

5. Government Securities

Government securities are issued by the government and are viewed to be one of the safest investment avenues on account of the significant creditworthiness of governments. These securities carry a fixed interest rate and are available in short and long-term tenures.

Usually, the interest rate, called the risk-free rate offered by G-Secs, is considered the benchmark rate for other debt instruments.

6. Commercial Papers

Commercial papers are like promissory notes issued by entities for short-term borrowing needs. The face value of a commercial paper is Rs. 5 lakhs, and the value is expressed in multiples of Rs. 5 lakhs.

The minimum duration of commercial papers is 15 days, and the maximum is 364 days or a year.

Also Read: Equity Markets vs Debt Markets

Advantages of investing in debt instruments

  • Guaranteed returns

The primary feature of debt instruments is the guaranteed returns they promise. Every debt instrument carries a fixed rate of return, giving you a guaranteed income over the tenure of the investment.
So, if you are risk-averse or want guaranteed investment returns, the debt market can always be a safe and suitable choice.

  • Safety from market volatility
    The equity market is prone to volatility, wherein the value of investments fluctuates constantly. This volatility, however, is usually negligible in debt markets.
  • Portfolio diversification
    A diversified portfolio is helpful for risk mitigation and also for enhanced returns. The  debt market allows you to add the debt component to your portfolio and diversify it. Moreover, with their fixed returns, debt instruments also make the portfolio returns more stable.
  • Tax benefits
    Some debt instruments offer tax benefits as well. For instance, if you invest in 5-year fixed deposits or in National Savings Certificates, your investment qualifies for a tax deduction under Section 80C. The deduction limit is Rs.1.5 lakhs which can give you a tax saving of Rs.45,000 if you fall in the 30% tax bracket.

Also Read: Equity Markets vs Debt Markets

Disadvantages of investing in debt instruments

While you can enjoy the benefits of investing in the debt market, there are some drawbacks too that you should be aware of. These include:

  • Vulnerability to debt market risks 

Though the debt market does not face significant volatility risks, other risks affect the market, which are:

  • Default or credit risk – the risk that the issuing entity defaults on interest and/or principal repayment
  • Interest rate risk – Debt instruments follow an inverse relationship with the fluctuating interest rates of the economy. When interest rates rise, the value of debt instruments falls and vice-versa.
  • Reinvestment risk – the risk of reduction in the interest rate at the time of the security’s maturity, leaving you with minimal or no options for reinvestment

Such risks might impact your returns when you invest in the debt market.

  • The returns are not inflation-adjusted

While the debt market promises guaranteed returns, the returns are not usually inflation-adjusted, which means that the returns do not factor in the loss of the purchasing power of money due to inflation.

So, the returns you get might not have any real value if inflation is higher than the returns from the security.

For example, you invest Rs. 1000 in a fixed deposit and get Rs. 1200 after five years. At the time you invested that Rs. 1000, you were able to buy 100 units of a pen with that money (Price of 1 pen= 1000/100, i.e. Rs.10)

However after five years, the cost of the same pen increased to Rs. 15.

So, now with your corpus of Rs.1200, you can buy only 80 pens (1200/15). While it seems that you earned Rs. 200 in five years, the return has no real value if inflation is considered.

  • Liquidity concerns

Debt instruments restrict premature withdrawals. If you make such withdrawals, you might face a penalty.

Moreover, even in the case of bonds that can be traded on the stock exchange, you might not get a fair price when you sell the bond immediately to raise liquid funds.

So, if you want liquidity in your portfolio, debt instruments might fail to meet your expectations.

How Does the Debt Market Benefit the Financial System and the Economy?

The debt market has a positive impact on the overall economy of the country. Here’s how:

  • It allows the government to raise necessary funds to finance the country’s development 
  • This market gives fixed returns and predictable income to investors with lesser risk. 
  • Companies can issue debt instruments to raise funds without diluting their equity to ensure enhancement of business operations.

Concluding thoughts

The debt market is an integral part of the economy. It offers various debt instruments that you can choose to invest in. While there are significant benefits of investing in the debt market, you should also consider the associated frailties before investing. An investment tool is ideal only if it aligns with your individual goals and risk portfolio. Therefore, you should always do your due diligence before going ahead with any investment.


  • What are the common risks associated with debt market investments?

The common risks associated with debt markets include the following:

  • Credit risk: the risk of default on the instrument
  • Interest rate risk: It’s the risk of rise in interest rates and the dip in the value of the debt instruments as a consequence – on account of reduced yield 
  • Reinvestment risk: the risk of a reduced interest rate at the time of reinvestment
  • What is the difference between the primary and secondary bond markets in India?

The bond market in India can be divided into primary and secondary markets. The primary market is where governments and other financial institutions sell new bonds directly to investors. On the other hand, the secondary market is where the bonds are traded between investors.

  • Who regulates the debt market in India?

India’s debt market is regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Equity investments do not guarantee returns, but debt investments do. Moreover, equity investments are prone to market volatility, whereas debt instruments carry negligible volatility risk. Debt instruments make you creditors of the issuing entity, but equity instruments give you ownership rights.

  • Why do companies sell debt securities?

Companies sell debt securities to raise funds for their financial needs such as running operations, purchasing equipment, or growing the business.

  • What are the factors affecting the Indian debt market?

The factors that primarily affect the debt market are inflation rates, higher exchange rates and higher public debt.

  • What are the functions of the debt market in India?

The debt market enables the government to raise funds to support its development initiatives. It is crucial for the economy’s effective resource allocation and mobilisation.

  • Why Indian debt market is underdeveloped?

There are a bunch of reasons why the Indian Debt market is underdeveloped. The banking sector’s dominance, high risk and lack of transparency are some of the primary reasons why.

Was this helpful?

Chandhana Padma

Investment Associate
Chandhana is a budding investment professional with growing expertise in the capital markets. She has completed her Bachelors in Business Administration with a specialisation in Finance from Christ (deemed to be) University,Bangalore. She is also a CFA L2 candidate. She is currently working as an Investment Associate at Wint Wealth.

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