Indian debt markets have been experiencing a boom in the recent past, thanks to the long rally in the equity markets and low interest rates regime. Keeping in view the trends in interest rates and inflation, the debt markets are poised to continue the bull run in line with the global markets.

The Indian debt market has been in a multi-year bull market as interest rates have fallen steeply over the last few years. The government and industry are happy since their borrowings are substantially cheaper. The banks are happy since their gilts (government securities) portfolio has appreciated sizably and has strengthened their balance sheets in the process. Investors in bonds and bond mutual funds are happy since their investments have yielded them double-digit returns over the last few years. Only the retirees and the savers in all categories are upset that their interest incomes have fallen sharply.

To understand the present situation, a brief recap of the past is in order. Traditionally, India has been a high cost economy due to the license raj where capital was supposed to be scarce and interest rates high. Artificial barriers created artificial markets. Inflation levels were high and the rupee steadily depreciated. The protected economy allowed profiteering and high interest rates were affordable since the consumer picked up the tab anyway. In addition to the organized credit channels, money lending in the unorganized channels was substantial, at high rates of course. Everybody seemed to co-exist happily until the boom of 1994 accompanied by a credit and speculative orgy. The subsequent bust post-1995 led to large losses for many entities who had lent money to non-banking finance companies like CRB Caps, real estate companies, stock market speculation and numerous other ventures.

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