BOND MARKET IN INDIA

OBJECTIVE
• To study and analyze the bond market in India
• To understand the various instruments traded in bond market in India
• To understand the demand side and supply side in bond market in
India
• To understand the major reforms in bond market and how the macro-
economic activities affect the bond segment of capital market
• To understand the valuation of bonds
• Find out the reasons for an under-developed bond market in India
• Comparison of bond market of India with other Emerging East Asian
(EEA) countries
• Recommending measures to further deepen and impart greater
liquidity to bond market
 INTRODUCTION
• Bonds
–  It is a loan that obliges issuer to pay periodic interest and principal
on maturity.
• Bond Yield
– Current Yield is the percentage return a bond investment promises at
any given price
– Yield-to-Maturity is the return an investor expects if he buy a bond at
a given price and hold it till maturites
• Why Invest in Bonds
– Steady and Stable stream of income
– Protects your Portfolio
– Tax Advantages
Interest Rate Fluctuations & Bond Markets
 BOND MARKET
• Bond market is a financial marketplace where
debt instruments, primarily bonds, are traded.

• Key participants are:-

– Issuers
– Underwriters
– Purchasers
 Importance of Bond Market
• Efficient mobilization and allocation of resources in any economy.
• Facilitating liquidity management with short term and long term
objectives.
• Opportunity for investors to diversify their investment portfolio.
• Higher liquidity and control over credit.
• Increased funds for implementation of government development
plans. The government can raise funds at lower costs by issuing
government securities.
• Reduced role of banks and political intervention in use of funds, as
banks have to follow norms laid down by the central bank.
 NEED FOR ACTIVE CORPORATE BOND
MARKET IN INDIA
• Infrastructure financing
• Securitization
• An alternative source to raise funds for companies during
the bearish market.
• With expanding domestic demand and export growth,
growth in industrial investments will undoubtedly
accelerate leading to greater demand for bond financing.
• an incentive for FIIs to stay invested in India during the
down cycle in equity market and thereby marginalizing
systemic risk posed by today's inflow of portfolio money.
 BOND MARKET IN INDIA
• STRUCTURE OF BOND MARKET IN India
• REGULATORS OF BOND MARKET IN INDIA
– Reserve Bank of India
• Government Securities
– Securities and Exchange Board of India (SEBI)
• Corporate Bonds
FACTORS AFFECTING INDIAN BOND MARKET

• Inflation
• Fiscal Policy
• Attractiveness of debt market
• Economic Growth
• Monetary Policy
 DEBT INSTRUMENTS TRADED IN INDIA
Segment Issuer Instruments
Treasury Bills, Dated Securities, Zero
Government Central Government Coupon Bonds, Coupon Bearing bonds,
Partly paid Stocks, Capital Index, Bonds,
Floating Rate Bonds, Inflation Index Bonds
Public Government Agencies / Govt. Guaranteed Bonds, Debentures
Sector Statutory Bodies

Public Sector Units PSU Bonds, Debenture, Commercial

Paper
Private Corporate Debentures, Bonds, Commercial Paper,
Floating Rate Bonds, Zero Coupon Bonds
Banks Certificate of Deposits, Bonds
Financial Institutions Certificate of Deposits, Bonds
GOVERNMENT SECURITIES
• Zero Coupon Bonds
• Partly Paid Stock
• Floating Rate Bonds
• Capital Indexed Bonds
• Inflation Linked Bonds
• Government Securities With Embedded Call
And Put Options
NON SLR BONDS
• Govt. guaranteed bonds
• Public sector undertaking bonds
CORPORATE BONDS
SHORT TERM MONEY MARKET INSTRUMENTS
• Call/ Notice/ Term Money
• Treasury Bills
• Repo/ Reverse Repo
• Commercial Paper
• Certificate of Deposit 
• Inter Bank Participation Certificate
 DEVELOPMENTS IN INDIAN BOND
MARKET
• Introduction of repo/reverse repo transactions in government
securities to facilitate participants of manage short term liquidity
mismatches.
• Commencement of Negotiated Dealing system (NDS), an automated
electronic trading platform.
• Establishment of Clearing Corporation of India Ltd. (CCIL) for
providing an efficient and guaranteed settlement platform.
• Introduction of G-secs in stock exchanges.
• Introduction of Real time Gross Settlement System (RTGS) which
addresses settlement risk and facilitates liquidity management.
• Adoption of a modified Delivery-versus-Payment mode of settlement
which provides for net settlement of both funds and securities legs.
• Announcement of an indicative auction calendar for Treasury Bills
and Dated Securities.
• Permitting short sales and ‘when issued’
transactions to be covered outside NDS-OM
platform.
• Extension of NDS-OM platform to certain
qualified gilt account holders and
• Putting in place a settlement mechanism to
permit settlement of Government securities
transactions through fund accounts
maintained with commercial banks.
 SCENARIO OF BOND MARKET IN
INDIA IN 2010-11
• Average Daily Call Rate reduced from 6.7% in
December 2010 to 6.5% in January 2011
• Reduction in inflationary pressures led the
yield on 10 year 7.8% 2020 G-sec to come
down to 7.99% from 8.2%.
• Banks and NBFC launched Infra bonds which
were made tax exempted by government in
union budget 2010.
 Global Financial Market Developments

Govt Bond Yields in Advanced Economies Sovereign CDS Spreads – Euro Area

Sources: Reserve Bank of India

Movements in Money Market and Turnover

Sources: Reserve Bank of India

G-Sec Yield Curve Shift Reflects Expectation
Of Policy Rate Changes
Government Securities Yield Curve AAA rated Corporate bond and Govt. Bond

Sources: Reserve Bank of India

Bond Market Size In India

Source : Bank for International Settlement

Trends in Trading

Source: nseindia.com as on 5 th sep 2010

INDIAN BOND MARKET WITH OTHER ASIAN
ECONOMIES
• Corporate Bond market in India grew at 8.2%
in comparison of 24.4% as average growth of
Asia.
• Bond market size in India was 52% of the GDP
of the economy.
Total Turnover Of Various South Asian
Economies

Source: AsiaBondsOnline ; BIS

Bond market Size compared to total GDP of
an Economy

Source: AsiaBondsOnline ; BIS

Bond Turnover Ratio of South Asian
Economies

Source: Bank for International settlement

 CORPORATE BOND MARKET
Major developments in Corporate bond market in India are as
follow:-
• Dematerialization of holdings in 2002.
• Increased trading transparency from compulsory reporting
of trades with three trade reporting avenues for corporate
bonds—SEBI began publishing trading details in January
2007
• Documentation requirements for private placements have
become more stringent.
• Linking local rating agencies (of which there are five offering
bond ratings) to international rating agencies.
 CONSTRAINTS IN DEVELOPMENT OF
CORPORATE BOND MARKETS
• Most Issues are not Corporate but Private Placements
• Demand for Corporate Bond Finance is Limited
• Companies with High Credit Ratings Dominate Corporate
Issuance
• Trading Infrastructure lacks development
• Repurchase Agreements are not permitted for Corporate
Bonds
• Problems with commercial banks
• Diversity Of Investor Base
• Flow Of Timely Information
 HOW TO DEVELOP CORPORATE BOND
MARKET
• Investor base should be broadened
• Development Of Derivatives Market
• Repo should be introduced in Corporate bond Market
• Market Making
• Listing Norms To Be Eased
• Developing A Trade Reporting System
• Developing A Market For Debt Securitization
• Cost of Issuance
• Bond Insurance
• Tax Exemption on Interest Income and Capital Gains
• Should be included in category of SLR requirements.
 VALUATION OF A BOND
• Bond Valuation is the determination of
the fair price of a bond
• Formula for calculating price of a bond:-

n
rc M M
VB   
t 1 (1  rD ) (1  rD ) n
Interest Rate or YTM
• YTM is the discounting rate for discounting the
future cash flows of a bond.

Interest Rate = Sovereign + Inflation + Liquidity + Default Risk + Maturity

(YTM) Rate Rate Premium Premium Premium
 SECURITIZATION POLICIES IN INDIA

• Securitization in India is in three major areas:-

– Mortgage Backed Securities
– Infrastructure Sector
– Asset Backed Securities
 INITIATIVES TAKEN BY RBI AND SEBI
• RBI puts out draft guidelines on repo in corporate debt
securities.
• Trades in corporate bonds are to be reported at NSCC or
CCIL.
• Simplification of Debt Listing Agreement for Debt Securities.
• Establishment of CoBoSAC by SEBI
• Set up a high-level committee on corporate bonds and
securitization by Govt of India
• Sebi has permitted the BSE, the NSE and Fimmda to set up
bonds trading platforms
 INITIATIVES TAKEN BY RBI AND SEBI
• SEBI has recently issued NOC to Bloomberg Data
Services Pvt Ltd, ICAP India Pvt Ltd and Reuters India
Pvt Ltd to set up trade facilitating platforms.
• SEBI plans to attract market makers by offering them
tax incentives.
• SEBI has recently authorized FIMMDA to set up a
platform for reporting secondary transactions in
corporate bonds
• SEBI has relaxed certain requirements in the DIP
Guidelines 2000 for issuing a bond.
 RECOMMENDATIONS
TO DEVELOP PRIMARY BOND MARKET
• Stamp Duty
• TDS
• Enhancing Issuer Base
• Listing of Issues
• Enhancing Investor Base
• Consolidation of Privately Placed Bonds
• Bonds Primary Issuance Database
TO DEVELOP SECONDARY BOND MARKET
• Trade Reporting System
• Clearing and Settlement System
• Order Matching Trading System
• Reduction of Shut Period
• Unified Market Convention
TO DEVELOP SECURITIZED BOND MARKET
• Stamp Duty on Securitized Debt
• Credit Enhancement Mechanism
• Specialized Debt Funds for Infrastructure
Financing
 LEARNINGS
• Gained the basic knowledge of Bond and other related concepts.
• Learned the importance of Bond Market in any economy, especially
India.
• Understood the Structure of Bond Market in India.
• Gained the knowledge of various Instruments traded in Bond
Market in India and of current situation of bond market in India.
• Understood the need of Active Corporate Bond Market in India
• Learned the developments of Bond Market in other Emerging Asian
Economies and where India needs to catch up.
• Gained the knowledge about various reforms undertaken Govt. of
India, RBI and SEBI to develop bond market and impact of these
measures.