Capital Markets: India's Debt Market, Yield Curves and Repo Transmission
After understanding the Indian Banking Landscape - RBI, PSBs, private banks and NBFCs - the next interview question is how these institutions interact with capital markets. India's debt market is the largest by volume but less liquid than equity markets, so it is central to fixed-income and banking roles. This lesson maps the main debt instruments, explains yield curves, and shows how an RBI repo rate change can travel into actual borrowing costs.
- India's debt market comprises government securities, corporate bonds, and money market instruments, and is the largest by volume but less liquid than equity markets.
- Government securities include G-Secs, SDLs, and T-Bills, with the Union Government, state governments, or Government of India as issuers.
- Corporate borrowing instruments include corporate bonds, CP, NCDs, and bank capital instruments such as AT1 and Tier 2 bonds.
- Credit rating matters because corporate bonds are rated by CRISIL, ICRA, and CARE Ratings, and the spread over G-Sec depends on rating.
- Yield curves are described as normal, inverted, or flat by comparing maturity and yield.
- Repo rate transmission follows: RBI increases repo, banks' cost of funds increases, MCLR increases, loan rates increase, borrowing decreases, and inflation decreases.
- As of FY2024, repo was 6.50%, SDF was 6.25%, and MSF was 6.75%; the RBI MPC raised rates by 250 bps in 2022-23 to control post-COVID inflation, then paused.
The Big Picture: Where the Debt Market Fits
For interview purposes, treat the debt market as a map of who is borrowing, for how long, at what yield, and with what risk. The source universe has three main buckets - government borrowing, corporate and bank borrowing, and short-term money market borrowing. The interviewer is usually checking whether you can connect instruments to issuers, tenors, yields, liquidity, and RBI policy transmission.
A fixed-income instrument is a debt instrument where an issuer borrows money for a defined tenor and investors evaluate the yield, credit quality, and repayment priority; examples here include G-Secs, SDLs, T-Bills, corporate bonds, CP, CD, AT1 bonds, Tier 2 bonds, and NCDs.
Core Fixed-Income Instruments in India
Tenor means the period until repayment or maturity. Yield is the return level quoted for the instrument. In interviews, do not list instruments randomly; group them by issuer, maturity, and risk. This makes the answer sound like a capital markets map rather than a memorised table.
G-Sec means government security, also called gilt in the source. SDL means State Development Loan. T-Bill means Treasury Bill. CP means Commercial Paper, CD means Certificate of Deposit, AT1 means Additional Tier 1, NCD means Non-Convertible Debenture, NBFC means Non-Banking Financial Company, HFC means Housing Finance Company, and PSU means Public Sector Undertaking.
SLR means Statutory Liquidity Ratio, the regulatory liquidity bucket for which eligible securities matter. NDS-OM means Negotiated Dealing System - Order Matching, the trading system named for G-Secs in the source. SEBI means Securities and Exchange Board of India, which is relevant in the source for public NCD regulation. A useful nuance is that higher yield does not automatically mean better value; it may reflect credit risk, subordination, longer tenor, or lower liquidity.
Government Securities: Benchmarks, Liquidity and Spreads
Government securities are the anchor for the debt market because they provide benchmark yields. G-Secs are issued by the Union Government with the Reserve Bank of India as agent, carry a sovereign guarantee, are SLR eligible, and trade on NDS-OM. The 10-year G-Sec is specifically highlighted as the benchmark in the source.
SDLs are issued by state governments and usually carry a spread over G-Secs. The source gives an approximate ~30-40 bps spread over G-Sec, where bps means basis points. One basis point is one hundredth of a percentage point, so 30-40 bps means 0.30-0.40 percentage points. The key interview nuance is that SDLs are also SLR eligible, but state fiscal quality varies.
T-Bills are different because they are short-term money market instruments issued by the RBI for the Government of India. They come in 91, 182, and 364 day tenors and are discount instruments. In a banking interview, T-Bills help you show that government borrowing is not only long-term; it also covers short-term liquidity and money market funding.
Corporate, Bank and NBFC Instruments
Corporate bonds are issued by public and private companies and PSUs for tenors of 1 - 15 years. Their FY24 approximate yield range in the source is 7.5-9.5%, and they are credit rated by CRISIL, ICRA, and CARE Ratings. The spread over G-Sec is based on rating, so a strong answer should connect yield to credit rating rather than treating the coupon or yield as an isolated number.
CP, or Commercial Paper, is a short-term corporate borrowing instrument for working capital needs. The source specifies corporates with minimum net worth of ₹100 Cr, a tenor of 7 days - 1 year, FY24 approximate yield of 7.0-8.0%, and use by only well-rated companies. CD, or Certificate of Deposit, is issued by banks and financial institutions to raise short-term funds, also for 7 days - 1 year, with FY24 approximate yield of 7.0-7.8%.
AT1 and Tier 2 bonds are bank regulatory capital instruments. AT1 is perpetual, Tier 2 is 10 years, and they can absorb losses in resolution. The source gives AT1 yield at 8.5-9.5% and Tier 2 at 8%, with the important caveat that these instruments are higher yielding but subordinated to depositors. NCDs are issued by NBFCs, HFCs, and corporates for 1 - 10 years, with FY24 approximate yield of 8.5-11%, and may be public or private placement, fixed or floating rate.
Reading Yield Curves
A yield curve is the relationship between maturity and yield. The source names three curve types: normal, inverted, and flat. You do not need to overcomplicate this in a placement interview; first describe the shape correctly, then link it to instrument pricing or borrowing cost discussion.
The practical use is comparison. A 91-day T-Bill and a 10-year G-Sec sit at different points on the maturity spectrum, so their yields should not be compared without acknowledging tenor. Similarly, a corporate bond spread over G-Sec should be read with rating, tenor, and issuer type in mind.
How RBI Repo Changes Reach Borrowers
RBI means Reserve Bank of India. The repo rate is the short-term rate at which RBI lends to banks, and it anchors short-term interest rates. The source gives the transmission chain as: RBI increases repo, banks' cost of funds increases, MCLR increases, loan rates increase, borrowing decreases, and inflation decreases. MCLR means Marginal Cost of Funds Based Lending Rate, the bank lending-rate benchmark referenced in the chain.
As of FY2024, the source gives Repo = 6.50%, SDF = 6.25%, and MSF = 6.75%. SDF means Standing Deposit Facility and MSF means Marginal Standing Facility. The MPC, or Monetary Policy Committee, raised rates by 250 bps in 2022-23 to control post-COVID inflation, then paused.
The nuance is that transmission is a chain, not a single jump. In many banking interviews, candidates say “repo goes up, loans go up” and stop there. A stronger answer explains the intermediate banking mechanism: funding cost rises, MCLR moves up, loan rates rise, borrowing falls, and inflation pressure reduces.
Worked Example: Repo Hike to Borrowing Cost
This worked example is useful because it connects three interview areas at once: RBI policy, banking balance-sheet cost, and fixed-income yields. It also helps you avoid treating the debt market as a list of instruments with no connection to the real economy.
Structuring a Capital Markets Interview Answer
"Can you explain India's debt market and how an RBI repo rate change affects borrowing costs?"
The best answers do not memorise yields in isolation. They explain why the yield exists - sovereign guarantee, state spread, credit rating, subordination, tenor, or short-term funding need.
The most frequent error is mixing up instruments without issuer and tenor. Saying “bonds give higher returns” is too vague and costs points because a G-Sec, CP, AT1 bond, and NCD have different issuers, maturities, risk positions, and policy links.
Conclusion
India's debt market is best understood as an interview-ready map of fixed-income instruments, yield curves, and RBI transmission. If you can classify the instrument, compare its yield to the benchmark, explain the role of ratings or subordination, and connect repo changes to MCLR and borrowing costs, you can handle most banking and capital markets questions on this topic.