Topic 2: DEBT MARKETS: STABILITY BORROWED

The Indian debt market demonstrated robust performance in December 2024, underpinned by several favourable trends and strategic policy decisions. Corporate bond issuance saw a record-breaking surge, with Indian companies raising ₹10.67 trillion (around $124.81 billion) by December 27, marking a 9% year-on-year increase. This boost in fundraising was fuelled by a stable economic climate, declining bond yields, and a strong investor appetite for long-term debt instruments. The increased demand for corporate bonds highlighted the attractive borrowing conditions for firms in a favourable macroeconomic environment. Debt mutual funds also showed strong results, with many schemes posting high single-digit returns. Gilt Funds and Corporate Bond Funds focusing on medium to long-term maturities generated average returns exceeding 9%. Short-duration funds delivered solid returns as well, slightly surpassing those of 2023. These positive returns reflected an overall healthy market for debt investments, driven by demand for stable income and long-term capital preservation. The benchmark 10-year government bond yield witnessed its sharpest decline in four years, falling within the range of 6.7% to 7.2%. This drop was attributed to strong demand for government securities, driven by factors such as fiscal discipline, a lower fiscal deficit, and expectations of future interest rate cuts by the Reserve Bank of India (RBI). Investors were particularly encouraged by India's favourable debt-to-GDP ratio, which instilled confidence in the stability of the country’s debt market. The RBI played a crucial role in maintaining market stability throughout December. The central bank’s decision to keep interest rates steady contributed to lower yields on government securities, as the stability helped drive demand for bonds. Additionally, the RBI’s outlook on interest rates, signalling a stable or declining trend, made existing bonds with higher coupon rates more attractive to investors. This shift led to capital gains for bondholders, adding a layer of support to the debt market. The RBI also managed liquidity carefully, using Open Market Operations (OMOs) and other tools to stabilize financial conditions. By injecting liquidity into the system, especially during periods of market stress, the RBI ensured that the debt market remained liquid and functional. These actions provided much-needed stability, reinforcing investor confidence in the bond market. A significant development in December was the Federal Reserve’s decision to cut its interest rate by 25 basis points to a target range of 4.25% to 4.50%. Initially, the announcement sparked positive sentiment in global markets, including India, as lower U.S. interest rates tend to make emerging market debt more attractive. However, the Fed’s guidance on fewer rate cuts in 2025 than initially expected tempered optimism, leading to increased caution among investors. Despite this, the decline in U.S. interest rates and the subsequent dip in yields on government securities in India attracted strong demand for bonds. The RBI’s actions complemented global trends by managing domestic liquidity effectively. The central bank's prior reduction of the Cash Reserve Ratio (CRR) played a key role in absorbing some of the volatility triggered by global market movements and U.S. monetary policy. This ensured that liquidity remained stable, cushioning the impact of potential capital outflows from emerging markets due to global uncertainties. To summarise December 2024 witnessed a strong performance from the Indian debt market, marked by robust corporate bond issuance, healthy returns from debt mutual funds, and favourable macroeconomic conditions. The RBI's effective management of liquidity and interest rates played a crucial role in maintaining market stability, while global factors such as the Fed’s rate cut contributed to a positive sentiment in India’s debt market. Despite challenges, including global inflation pressures and cautious investor sentiment, India’s debt market ended the year on a high note, showcasing its resilience amidst global economic volatility.

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