Debt Markets and Yield Curves

The debt market is larger than the equity market in most economies and provides a continuous real-time read on how investors assess risk and the future path of interest rates. In India, the government securities (G-sec) market is the backbone, RBI's monetary policy actions ripple through it, and corporate bond spreads are priced relative to it.

The yield curve plots the yields of bonds of the same credit quality (typically government bonds) across different maturities. Its shape encodes market expectations about growth, inflation, and monetary policy. A normal upward-sloping curve means long-term rates are higher than short-term rates, the standard condition. An inverted curve (short-term rates above long-term) has historically preceded recessions in many economies.

For corporate analysts, the yield curve is the starting point for any fixed income pricing and for understanding the discount rate environment in which equity valuations are set.

Indian debt market instruments:

• G-Secs (Government Securities): Issued by Central Government via RBI auctions. Tenors: 91-day, 182-day, 364-day T-Bills (zero coupon); 2-year to 40-year dated securities (fixed/floating coupon)
• State Development Loans (SDLs): Issued by state governments, typically 10–25 bps spread over central G-sec
• Treasury Bills (T-Bills): Short-term, zero-coupon, issued at discount
• Corporate Bonds / NCDs (Non-Convertible Debentures): Issued by companies, rated, typically listed on BSE/NSE debt segment
• Commercial Paper (CP): Short-term unsecured corporate borrowing (7 days to 1 year)
• Certificate of Deposit (CD): Issued by banks, highly liquid

Yield curve shapes:

• Normal (upward sloping): Long-term yields > short-term yields, typical when economy is growing
• Flat: Short and long-term yields converge, often signals a turning point
• Inverted: Short-term > long-term, historically associated with recession expectations
• Humped: Medium-term yields highest, unusual

RBI tools that affect the curve:

• Repo rate: Short-end anchor (rate at which banks borrow from RBI)
• OMOs (Open Market Operations): RBI buys/sells G-secs to manage liquidity and long-end yields
• LAF (Liquidity Adjustment Facility): Repo and reverse repo form the interest rate corridor