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Despite navigating global turbulence, India’s bond market emerged, in 2023, as a beacon of resilience and dynamism. Propelled by robust fundamentals, regulatory tailwinds, and increased retail participation, the year witnessed significant milestones and laid the groundwork for a promising future. Here are the key trends shaping this exciting landscape:
2023 witnessed a notable climb in Indian bond yields, fueled by rising inflation and the Reserve Bank of India’s (RBI) proactive rate hikes. This enhanced the appeal of fixed-income instruments to yield-seeking investors.
Recognizing the potential of foreign capital inflows, the RBI increased the foreign investment limit in sovereign debt from 5% to 7%. This policy move significantly broadened the investor base for government bonds, further bolstering demand and contributing to the rise in yields.
A significant milestone for the Indian bond market was its inclusion in the prestigious JP Morgan Government Bond Emerging Markets (GBI-EM) Index, effective June 2024. This inclusion will provide Indian government bonds with increased visibility and accessibility to a wider pool of global investors, potentially leading to further yield adjustments.
The RBI’s 25% increase in risk weight on consumer credit exposure is expected to have a ripple effect on the corporate bond market. This policy tweak incentivizes Non-Banking Financial Companies (NBFCs) to seek funding through the corporate bond market, thereby increasing demand and potentially pushing yields up by 5-15 basis points.
One of the key highlights of 2023 was the removal of long-term tax benefits for debt mutual funds in the budget announcement, with this the regulator has created a level playing field for fixed-income instruments. This move makes corporate bonds and debt mutual funds equally attractive to investors, allowing them to make informed choices based on their individual risk appetite and investment goals.
The Securities and Exchange Board of India (SEBI) played a pivotal role in shaping the trajectory of the market by crafting strategic regulations. Clear rules for Open Bond Platform Providers (OBPPs), stricter disclosure norms, and the endorsement of tech-driven investment experiences not only instilled investor confidence but also nurtured the rapid growth of OBPPs.
SEBI’s proposed reduction in NCD face value from Rs 1 lakh to Rs 10,000 is another step towards wider retail participation. This lower entry point makes NCDs more accessible to smaller investors, broadening the investor base and boosting market liquidity. Explore further insights on how this measure could potentially reshape the ecosystem, as commented by Vibhor Mittal, COO at Aspero, here.
SEBI has also mandated stock brokers to conduct a minimum of 10% of their total secondary market trades by value through RFQ platforms thus ensuring fair pricing discovery, eliminating potential manipulation, and protecting investors’ interests.
One of the most significant trends in 2023 was the 50% surge in retail participation in corporate bonds. This shift signifies a growing awareness and appetite for fixed-income instruments among individual investors, marking a watershed moment in the financial landscape.
So, what is driving this retail revolution?
Safety with Returns: Sovereign gold bonds and short-term corporate bonds emerged as preferred choices for their attractive blend of security and competitive returns. These instruments cater to risk-averse investors seeking both capital preservation and steady income, especially in a volatile market environment.
Democratised Access: The rise of Open Bond Platform Providers (OBPPs) played a crucial role in bridging the gap between retail investors and the bond market. With over 15 OBPPs like Wint Wealth, IndiaBonds, Grip Invest etc catering specifically to retail participants, digital access became the democratizing force, removing traditional entry barriers and empowering individuals to take control of their investments. Investors could now research, compare, and invest in bonds directly, all from the comfort of their homes.
As awareness and financial literacy increase, we can expect this trend to continue in the coming year, further invigorating the Indian bond market and creating exciting opportunities for issuers, investors, and intermediaries alike.
2023 witnessed a vibrant boom in India’s corporate bond market, with a staggering Rs 9 lakh crore (approximately $109.7 billion) worth of issuances, reflecting market depth. This robust activity was driven by several key factors:
Increased Appetite for Debt Instruments: Strong demand for fixed-income instruments fueled substantial issuances from across the corporate landscape. Banking giants like SBI led with a Rs 45,000 crore issuance, followed by HDFC Bank’s Rs 35,000 crore fund, highlighting established players’ confidence in the market’s potential.
Non-Banking Financial Companies (NBFCs) emerged as another key driver of growth, recognizing the advantages of diversifying their funding sources through the corporate bond route. The RBI’s move to encourage NBFCs towards corporate bonds is expected to further bolster this segment, potentially pushing yields up by 5-15 basis points and creating a win-win for issuers and investors alike.
Notably, issuances in crucial infrastructure sectors like renewables, roads, and energy saw a commendable upsurge. Entities like REC, National Highways Infrastructure, and Power Grid Corporation played a leading role, raising bonds to fuel India’s ambitious infrastructure development agenda.
As we reflect on the key trends of 2023, it’s evident that India’s bond market is not only resilient but also poised for sustained long-term growth, attracting diverse investor profiles and contributing significantly to the nation’s economic development.
The silver linings in 2023 set the stage for a promising future in the realm of fixed-income investments. Looking ahead, CRISIL Ratings predicted a promising picture for India’s corporate bond market, with projections indicating a doubling from ₹43 lakh crore in FY24 to an estimated ₹100-120 lakh crore in FY30.