The Bond Market in India, with the advent of liberalization, has been transformed completely. The opening up of the financial market at present has influenced several foreign investors holding up to 30% of the financials in the form of fixed income to invest in the bond market in India. The bond market in India presently has diversified to a large extent and that is a huge contributor to the stable growth of the economy. The bond market has immense potential today in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies. It is about this market that I emphasize in my article.
To understand the market properly it is imperative to understand the different types of bonds existing in the Indian bond markets today:
- Government Bonds- These are known as ‘Sovereign Debt’, government bonds are issued by the Central Government to raise money from the general It is a risk-free investment that offers stable returns and is suitable for investors with a low-risk appetite.
- Municipal Bonds- These are issued by the State government or the local government agencies to raise money to fund government As per SEBI, municipal bonds need to have a rating above the investment grade and should have a maturity period of 3 years, before being issued to the public. These bonds are also considered a safe investment option as they are backed by the State Government.
- Corporate Bonds- Large financial corporations and financial institutions issue corporate bonds to raise money. They offer higher returns, but the risk factor is also high. The maturity period on these bonds can go up to around twelve years.
- Public Sector Bonds- These bonds are issued by Public sector corporations, where the share of the Central Government is more than 50%. These bonds are implicitly guaranteed by the Union Government and are considered a safe investment.
- High Yield Bonds- These bonds are issued by companies who have just entered the market and are yet to establish themselves in the field. They are an extreme version of corporate bonds and thus, offer high returns but have a high-risk factor too.
In India, as noticed above bonds are issued by both the Government as well as the private-sector entities, to raise money for a specific purpose. They are essentially interest-bearing debt certificates. Bonds are like a loan that carries an interest rate and must be repaid on a specified date. Government and large corporations issue bonds when their funding requirement cannot be met from any other source. These thus, play a major role in fundraising and development activities as the respective organisations could take money for specific purposes through this instrument. They have a specified maturity period upon completion of which the borrower (Government or Private Corporation) returns the money to the lender. The money will be returned along with the interest, specified at the time of issue.
The Indian bond market is mainly dominated by government bonds. Government bonds are considered highly secure and enjoy excellent liquidity. The trading volumes in the Indian bond market have increased tremendously over the last ten years and around two dozen entities dominate the market today.
The Bond market in India is of two types:
- Primary market: In the primary bond market, the entity that needs to borrow money invites the general public or investment banks to purchase their bonds. The bonds are issued for a fixed tenure at a pre-specified interest rate.
- Secondary Market: In the secondary market, the investors who had purchased the bond previously, sell their bonds to other investors who wish to buy the same. Brokers also operate in the secondary market to facilitate all transactions.
Apart from bonds, there are a variety of instruments offered in the debt market such as Commercial Papers(CPs), certificates of deposits, Repo transactions, Treasury Bills, State Government Securities, STRIPS, Interest Rate Derivative products etc.
The biggest advantage of investing in the Indian debt market vis-a-vis other forms of investment is its assured returns. The returns that the market offer is almost risk-free (though there is always a certain amount of risks, however, the trend says that return is almost assured). The Safest amongst them being government securities. On the other hand, there are certain amounts of risks in the corporate, FI and PSU debt instruments. In such a situation the investors can take help from the credit rating agencies which rate those debt instruments. The interest in the instruments may vary depending upon the ratings. Another advantage of investing in the India debt market is its high liquidity. Banks offer easy loans to investors against government securities.
As there are several advantages of investing in the India debt market, it is not free of disadvantages. As the returns here are risk-free, those are not as high as the equities market at the same time. So, on one hand, you are getting assured returns, but on the other hand, you are getting way lesser return at the same time. Retail participation in the Indian market particularly the bond market is very less here, though it has increased recently. There are also some issues of liquidity and price discovery as the retail debt market is not yet quite well developed.
India’s bond market remains small compared with other major economies, the corporate bond market went through a series of credit events and the ensuing liquidity crisis over the past year. Presently, as the end of the year is approaching, the mood in financial markets is fretful. Around Rs 35,000 crore worth of redemptions or rollovers of bonds issued by non-banking financial companies (NBFC’s) are due.
If India is to see rapid economic growth over the long term – which is an absolute economic necessity – the bond market will have to play a pivotal role as a funding source. The bond market in India has a crucial role to play in the development of the economy and the government is undertaking various measures to strengthen the market in India.