India's debt market needs major structural reforms to finance the country's next growth phase, warns a Deloitte report. It is currently not equipped to meet rising credit demand for India to become a USD 7.3 trillion economy by 2030.
India's debt market is not equipped to finance the country's next phase of economic growth and requires structural reforms to improve liquidity, price discovery and participation, according to Deloitte's "State of Financial Services in India" report.
The report said India's economy is entering a phase that will require significantly higher levels of long-term capital, but the existing debt market is not capable of efficiently meeting those financing needs. "Changing household consumption and savings patterns mean that we can no longer rely on bank deposits to the extent we have in the past to fund rising credit demand. To realise the ambition of becoming a USD 7.3 trillion economy by 2030, the debt market must bridge this gap efficiently. Today, it is not equipped to do so," the report said.
Key Challenges Identified
According to Deloitte, price signals across the yield curve remain muted, risks are not adequately differentiated across borrowers and financial instruments, and a large volume of offshore non-deliverable forward (NDF) trading in the rupee often operates at odds with the domestic market. "As global conditions tighten, these issues will directly impede growth," the report warned.
Deloitte's Three-Point Reform Agenda
To address these challenges, Deloitte recommended three structural reforms. First, it called for deepening the debt market by broadening investor participation, improving liquidity and integrating the money, bond and derivatives markets so that short-term funding, long-term capital and risk-hedging mechanisms reinforce each other. The report also suggested rationalising reserve requirements for stable market borrowings and rethinking metrics such as the credit-deposit ratio to support market-based funding.
Second, Deloitte said interest rates should become "genuinely market-driven", supported by a robust benchmark yield curve across different tenors and risk categories. "Continued reliance on the administered repo rate weakens monetary policy transmission," the report said.
The third recommendation was to make India's domestic currency markets more attractive to global investors so that a larger share of rupee price discovery takes place within the country instead of offshore markets.
Supporting Long-Term Investment Needs
The report said these reforms would help create a more efficient financial system capable of supporting India's long-term investment needs as the economy expands over the coming decades. It added that stronger debt markets, along with improved financial inclusion, greater adoption of artificial intelligence and higher foreign capital inflows, represent some of the key priorities for the financial services sector going forward.
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