India’s debt market is not yet equipped to finance the country’s next phase of economic growth and needs structural reforms to support rising long-term capital requirements, according to Deloitte’s latest State of Financial Services in India report.The report said India can no longer rely on bank deposits to fund rising credit demand as household savings and consumption patterns evolve. It warned that unless the debt market becomes deeper and more efficient, it could become a bottleneck to the country’s economic ambitions.“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 $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.
Why debt market needs reform
As per news agency ANI, Deloitte highlighted several structural weaknesses in India’s debt market. It said price signals across the yield curve remain muted, risks are not adequately differentiated across borrowers and financial instruments, and a significant share of offshore non-deliverable forward (NDF) trading in the rupee often operates independently of domestic markets.The report warned that these shortcomings could hamper growth as global financial conditions become tighter.“As global conditions tighten, these issues will directly impede growth,” the report cautioned.To address these challenges, Deloitte proposed three major structural reforms.First, it recommended deepening the debt market by expanding investor participation, improving market liquidity and integrating the money, bond and derivatives markets so that short-term funding, long-term capital and risk-hedging mechanisms work together more efficiently.It also suggested rationalising reserve requirements for stable market borrowings and rethinking metrics such as the credit-deposit ratio to encourage greater market-based funding.
Market-driven rates, stronger domestic markets key
The second recommendation focuses on making interest rates genuinely market-driven through a stronger benchmark yield curve across various tenors and risk categories.“Continued reliance on the administered repo rate weakens monetary policy transmission,” the report said.The third reform calls for making 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.According to Deloitte, these reforms would help build a more efficient financial system capable of supporting India’s long-term investment needs as the economy expands over the coming decades.
Financial inclusion remains another challenge
The report also linked stronger debt markets with broader reforms needed across the financial sector. It noted that despite India’s rapid progress in digital finance, financial inclusion gaps persist.Only 14 per cent of India’s micro, small and medium enterprises (MSMEs) currently have access to formal credit, while the MSME credit gap was estimated at around Rs 25 lakh crore as of March 2025.Deloitte said the formal credit gap could be “well over INR 50 lakh crore” based on the sector’s contribution to GDP and a healthy credit-to-GDP ratio.The report added that improving debt markets, expanding financial inclusion, increasing the use of artificial intelligence in financial services and attracting higher foreign capital inflows will be critical to supporting India’s long-term economic growth.
