Bond Market In India

It is said that a "Healthy bond market is required in India for its infrastructure development".Do you agree with this statement?Give reasons in support of your answer.

The bond market has played its role this year as a good defensive asset in times of uncertainty. Bonds usually pay a higher yield than term deposits but that has not been the case during the past year. Because of the strong competition for retail deposits, banks have been offering attractive rates on term deposits.
Key ingredient of a healthy corporate bond market is a strong community of financial analysts. The role of financial analysts is to provide investors with independent and informed advice. In effect, the value of a sound financial reporting system is multiplied by the presence of profession of financial analysts, since their evaluation of the companies is now made easier and can therefore result in a better product. Thus, an informative accounting system also tends to raise the quality of analysts’ recommendations.
Recent years have seen the emergence of new types of corporate debt instruments, in particular high-risk (junk) bonds and mortgage- and other asset-backed securities. This in turn has led to a sharp increase in demand for credit analysis. A mature bond market will therefore also include the opportunity for what is known as private placements.
Another crucial feature of a smoothly functioning bond market is the presence of a mechanism for efficient reorganization in the case of default or bankruptcy. A developed corporate bond market is virtually certain to enhance economic welfare since it will encompass a wide range of relatively liquid financial debt instruments of different maturities and with default risks ranging from very low to high.

The Bond Market in India with the liberalization has been transformed completely. The opening up of the financial market at present has influenced several foreign investors holding upto 30% of the financial in form of fixed income to invest in the bond market in India.

The bond market in India 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 in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies.

Sometimes the unavailability of funds become one of the major problems for the large organization. The bond market in India plays an important role in fund raising for developmental ventures. Bonds are issued and sold to the public for funds.

Bonds are interest bearing debt certificates. Bonds under the bond market in India may be issued by the large private organizations and government company. The bond market in India has huge opportunities for the market is still quite shallow. The equity market is more popular than the bond market in India. At present the bond market has emerged into an important financial sector.

Yes, I totally agree with this statement "Healthy bond market is required in India for its infrastructure development" before coming to any point I am just briefing about the Role of bond market in the economy
A well-developed corporate bond market supports economic development. It provides an alternative source of finance and supplements the banking system to meet the requirements of the corporate sector to raise funds for long-term investment. It is believed that this segment acts as a stable source of finance when the equity market is volatile, and also enables firms to tailor their asset and liability profiles to reduce the risk of maturity. It also helps in the diversification of risks in the system. In view of huge investment requirement for infrastructure sector, the presence of a well-developed corporate bond market assumes significance in India. With the declining role of development finance institutions (DFIs), a developed and robust corporate bond market becomes all the more important.
Know further explaining my point the share of India bond market is very less as compare to the bond market of other developed country below are some facts and figure regarding bond market in India and other countries.

According to the Securities and Exchange Board of India (SEBI) database, outstanding corporate bonds amounted to around Rs. 9 trillion ($147 bn approx.) in 2011 making it nearly 10.5% of Gross Domestic Product (GDP) (SEBI 2012), whereas the proportion of bank loans to GDP in India is approximately 37%.
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In Figure above, outstanding corporate bonds are close to 90% of GDP in US where the corporate debt market is most developed and bond market financing has long replaced bank financing as a funding source for the corporates; around 34% in Japan and close to 60% in South Korea (Bank for International Settlements (BIS 2012). In terms of size, as of 2011, the Indian corporate debt market was close to 7% of that of China and 15% of that of South Korea (BIS 2012).

The bond market in India 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 in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies. Sometimes the unavailability of funds become one of the major problems for the large organization. The bond market in India plays an important role in fund raising for developmental ventures. Bonds are issued and sold to the public for funds. Bonds are interest bearing debt certificates. Bonds under the bond market in India may be issued by the large private organizations and Government Company. The bond market in India has huge opportunities for the market is still quite shallow. The equity market is more popular than the bond market in India. At present the bond market has emerged into an important financial sector.
The opening up of the financial market at present has influenced several foreign investors holding up to 30% of the financial in form of fixed income to invest in the bond market in India.

So, I think India must foces on its debt market for infrastructure development

The bond market in India 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 in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies. The opening up of the financial market at present has influenced several foreign investors holding up-to 30% of the financial in form of fixed income to invest in the bond market in India.


The different types of bond market in India are......
1.Corporate Bond Market
2.Municipal Bond Market
3.Government and Agency Bond Market
4.Funding Bond Market
5.Mortgage Backed and Collateral Debt Obligation Bond Market.

The major reforms in the bond market in India are.....

1.The system of auction introduced to sell the government securities.

2.The introduction of delivery versus payment (DVP) system by the Reserve Bank of India to nullify the risk of settlement in securities and assure the smooth functioning of the securities delivery and payment.

3.The computerization of the SGL.

4.The launch of innovative products such as capital indexed bonds and zero coupon bonds to attract more and more investors from the wider spectrum of the populace.

5.Sophistication of the markets for bonds such as inflation indexed bonds.

6.The development of the more and more primary dealers as creators of the Government of India bonds market.

7.The establishment of the a powerful regulatory system called the trade for trade system by the Reserve Bank of India which stated that all deals are to be settled with bonds and funds.

8.A new segment called the Wholesale Debt Market (WDM) was established at the NSE to report the trading volume of the Government of India bonds market.

9.Issue of ad hoc treasury bills by the Government of India as a funding instrument was abolished with the introduction of the Ways And Means agreement.

The Bond Market in India with the liberalization has been transformed completely. The opening up of the financial market at present has influenced several foreign investors holding upto 30% of the financial in form of fixed income to invest in the bond market in India.

The bond market in India 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 in raising funds to support the infrastructural development undertaken by the government and expansion plans of the companies.

Sometimes the unavailability of funds become one of the major problems for the large organization. The bond market in India plays an important role in fund raising for developmental ventures. Bonds are issued and sold to the public for funds.

Bonds are interest bearing debt certificates. Bonds under the bond market in India may be issued by the large private organizations and government company. The bond market in India has huge opportunities for the market is still quite shallow. The equity market is more popular than the bond market in India. At present the bond market has emerged into an important financial sector.

The different types of bond market in India
Corporate Bond Market
Municipal Bond Market
Government and Agency Bond Market
Funding Bond Market
Mortgage Backed and Collateral Debt Obligation Bond Market
The major reforms in the bond market in India
The system of auction introduced to sell the government securities.

The introduction of delivery versus payment (DvP) system by the Reserve Bank of India to nullify the risk of settlement in securities and assure the smooth functioning of the securities delivery and payment.

The computerization of the SGL.

The launch of innovative products such as capital indexed bonds and zero coupon bonds to attract more and more investors from the wider spectrum of the populace.

Sophistication of the markets for bonds such as inflation indexed bonds.

The development of the more and more primary dealers as creators of the Government of India bonds market.

The establishment of the a powerful regulatory system called the trade for trade system by the Reserve Bank of India which stated that all deals are to be settled with bonds and funds.

A new segment called the Wholesale Debt Market (WDM) was established at the NSE to report the trading volume of the Government of India bonds market.

Issue of ad hoc treasury bills by the Government of India as a funding instrument was abolished with the introduction of the Ways And Means agreement.

This lethargy in India’s bond market is not because of the absence of any effort on the part of the government to promote that market. In fact, the government has also held the view that a vibrant bond market is a prerequisite for the financing of long-term investment in the post-liberalisation period.

In the past a large part of such financing was supported with allocations from the budget in the case of public sector projects or with credit from the development finance institutions (DFIs) for private projects. The DFIs themselves were supported with concessional funds from the RBI and the government, especially the former, which had a separate window for the purpose. That era has, however, ended.

The government’s failure to mobilise adequate resources through taxation and its post-reform emphasis on fiscal consolidation, which limits its borrowing, has reduced its capital spending.

This requires the private sector to play a greater role in capital intensive industries and infrastructure. On the other hand, a consequence of Indian-style financial liberalisation has been the conversion through reverse merger of the DFIs into regular commercial banks.

ICICI Bank and IDBI Bank are all that is left of the erstwhile all-India development financing infrastructure. This has meant that the burden of financing private investment in capital intensive areas including infrastructure has fallen on the commercial banks, especially the public sector banks.

However, the maturity and liquidity mismatches between the funds sourced by the commercial banks and investments in large industrial and infrastructural projects has resulted over time in rising non-performing assets in the books of these banks. So they too are retreating from financing of investment in these areas.

Hence, besides foreign borrowing, a liquid bond market has become the only possible alternative to clear this financing bottleneck and support such investment.

To realise that alternative, investors looking for long term investment opportunities and offered the expected yield and the required liquidity as insurance have to be brought to market in adequate numbers.

Unfortunately, the penetration of the corporate bond market is almost marginal in the Indian financial sector. In 2014, while the ratio of bank deposits to GDP stood at 64 per cent, and that of domestic credit to the private sector at 52 per cent, the ratio of outstanding corporate bonds to GDP was only 14 per cent.

By the end of 2015 while corporate bond penetration in India was at around 17 per cent of GDP, the figure was close to 45 per cent in Malaysia and 75 per cent in South Korea.

Moreover, at the end of 2015, government securities (G-Secs, State Development Loans and Treasury Bills) accounted for 72 per cent of value of outstanding bonds, with corporate paper (bonds, commercial paper and certificates of deposit) contributing the balance 28 per cent.

Liberalisation fallout
The weakness of the bond market is partly the result of a larger failure of the financial liberalisation agenda. This was the failure to ensure the transition away from a bank dominated system, through a proliferation of non-bank financial institutions (NBFIs) that may have turned to the bond market for investment opportunities. As Chart 3 shows, when compared with South Africa, Brazil and Korea, the relative importance in terms of asset shares of NBFIs such as insurance companies, pension funds and other financial institutions was much lower in India.

This has been a bottleneck to the entry of saving households into the bond market (and more so the retail market for equity). The global evidence is quite clear that small investors are exposed to the debt market through institutions like mutual funds, insurance companies and pension funds. So the government’s effort seems to be to use the latter as means to bring a larger share of household savings into the corporate bond market.

It has done this in the past by persuading public sector insurance companies and pension funds to allocate a larger share of their investments to the market for corporate bonds. In addition, under the new pension scheme of the government, subscribers are required to choose some level of risk exposure as part of a move from defined benefit to defined contribution schemes. But, given the fiduciary obligations of investment managers in these funds, they tend to be cautious when following government advice.

Further, the relative importance of these institutions is far less than in many other countries. That does not help strengthen the corporate bond “market”.

Bank dependence
The Reserve Bank of India has in recent times attempted to respond to this through a host of measures. But the most important of those strengthens the problem of “bank dependence”. Banks are being roped in to render bonds less risky by extending the already existing partial credit enhancement (PCE) scheme. In September 2015, the RBI introduced a scheme under which banks were allowed to provide partial credit enhancement to bonds issued by corporate entities and special purpose vehicles.

This involves providing a non-funded but irrevocable line of credit linked to a bond issue, which companies can access to meet commitments in case they find themselves unable to meet interest or amortisation payments on the bonds. There were conditions set on this facility including the requirement that the rating of the bond issue must be “BBB minus“ or better before the credit enhancement and that the aggregate PCE provided by all banks to any bond issue cannot exceed 20 per cent of the bond issue size.

The essential aim of the PCE scheme is to reduce the risk associated with a bond and enhance its rating. With the banks taking over part of the risk, the bonds can be upgraded to investment grade, making them eligible for purchase by insurance and pension funds.

The new measure implemented also increases the aggregate PCE exposure of the financial system to any bond issue to 50 per cent (from 20 per cent) of the size of the issue, with a ceiling of 20 per cent on the exposure of any single bank. Measures such as this, it is hoped, will help resolve a problem, which has been created by the government’s own policies, of an unavoidable dependence for finances on a market that is still to mature. But in the process it is exposing banks, insurance companies, pension funds, and those who place their savings in these institutions to increased risk.

The Reserve Bank of India (RBI) on few day ago announced a comprehensive set of measures to change India’s lacklustre bond market and provide a push to the currency market as well, completing the agenda of Raghuram Rajan, the outgoing governor of the central bank.

The RBI proposed to allow banks to raise capital through masala (rupee) bonds in the overseas market and liberalised the currency market by allowing customers — residents and non-residents — to maintain big open positions.



Among a series of blockbuster measures, the RBI also proposed to allow listed companies to lend money to banks through repo market mechanism, essentially overnight money, something that can have wide ranging ramifications for call money rates, short-term money market rates as well as the banking system liquidity.

The central bank also proposed allowing listed companies to lend longer tenure money to banks through the repo market mechanism. This will have an impact on interest rates, the bond market, and liquidity in the banking system.

The RBI said it would also seek legal amendments to allow banks to borrow from it by pledging corporate bonds. This should raise demand for rated corporate paper and make secondary trade possible. Currently, 95 per cent of corporate bonds are privately placed.
Many of the measures for the corporate bond market were built on recommendations in a report by the HR Khan committee released a week ago by the Securities and Exchange Board of India. “These measures are intended to further market development, enhance participation, facilitate greater market liquidity and improve communication,” the central bank said.
The RBI also decided to enhance the aggregate limit of partial credit enhancement provided by banks to corporate bonds to 50 per cent of the bond issue size from 20 per cent earlier, provided a single bank restricted its enhancement to 20 per cent of the issue size. It also proposed to permit brokers in corporate bond repos, authorise the platform for repo in corporate bonds, and encourage credit supply for large borrowers through the market mechanism. “To further encourage the overseas rupee bond market, banks are being permitted to issue rupee bonds overseas (masala bonds) for their capital requirements and for financing infrastructure and affordable housing,” the central bank said.