💎 Why is India’s Bond Market Grabbing Global Limelight?


What are bonds?

Bonds are debt instruments issued by Governments, municipalities, or corporations to raise capital.

When you purchase a bond, you essentially lend money to the issuer in exchange for periodic interest payments and the return of the bond's face value when it matures.

They are considered a safer investment than stocks, providing a predictable income stream and making them a favoured choice for risk-averse investors and a crucial part of a diversified investment portfolio.

Who are the major players in the bond market?

The bond market has multiple stakeholders, each playing a crucial role in ensuring the market's smooth functioning and growth such as:

Government and its agencies:

  • Central Government: Issues sovereign bonds known as Government Securities (G-Secs) to raise funds for its various projects and to manage the country's fiscal deficit.

  • State Governments: Issue State Development Loans (SDLs) to meet their respective financial requirements.

  • Government agencies: Various government agencies and institutions also issue bonds to fund specific projects or operational needs.


Corporate entities:

Corporations issue bonds to raise capital for expansions, acquisitions, or other business initiatives. These bonds are typically unsecured and carry higher interest rates compared to government bonds due to the higher risk involved.

Financial institutions:

Banks, Non-Banking Financial Companies (NBFCs), and other financial institutions issue bonds to raise capital, manage liquidity, and comply with regulatory requirements.

Public Sector Units (PSUs):

PSUs issue bonds to meet their funding requirements for various projects and operational needs. These bonds often carry a quasi-sovereign status due to the government backing, thus attracting lower interest rates compared to corporate bonds.

Municipal corporations:

Municipal bonds are issued by municipal corporations or urban local bodies to fund infrastructure projects like water supply and urban transport.

How investors can participate in the bond market

Investors participate in the bond market to earn interest income and potentially benefit from price appreciation in the secondary market. The bond market attracts a wide range of investors due to its perceived stability compared to the equity market.

  • Primary market: Through the primary market, investors get access to new bonds.

    Here, entities like the government (both central and state), banks, Non-Banking Financial Companies (NBFCs), Public Sector Undertakings (PSUs), and corporations issue new debt securities to investors to raise capital. The issuance price is set, and investors buy the bonds directly from the issuers.

  • Secondary market: Post issuance, bonds find their way to the secondary market, where they are traded among investors, much like stocks. The price of bonds in this market fluctuates based on various factors, including market interest rates, credit ratings of the issuer, and the remaining time to maturity.

The bond market landscape in India

As of March 31, 2023, the total outstanding bonds in India have reached a remarkable $2.34 trillion.

Here's a breakdown of the various components and their respective contributions to the Indian debt market:


Government bonds dominate the Indian bond market, accounting for a whopping $1.83 trillion (78.17%).

Despite having a robust economy and a significant domestic government bond market, India remains absent from major global government bond debt indices. The absence of India from these indices deters foreign funds, which base their local currency investments on the ratings of major global bond indices, from investing in Indian government debt.


What are debt Indices?

Debt indices are benchmarks that track the performance of a basket of bonds, reflecting the broader market or a particular segment of it. They provide investors, fund managers, and policymakers with critical insights into the market dynamics, performance, and risks associated with bond investments.

Prominent global debt indices like the Bloomberg Barclays Global Aggregate Index and J. P. Morgan Emerging Market Bond Index not only provide a global perspective but also influence investment flows across borders.

How does adding Indian bonds to the J. P. Morgan index impact the market?

India's local bonds will find a place in the Government Bond Index-Emerging Markets (GBI-EM) index and the index suite, which is benchmarked by about $236 billion in global funds. The securities will be added over a span of 10 months with 1% increments on its index weighting, eventually reaching a maximum weight of 10% on the index.

The inclusion in the global index is expected to usher in a wave of foreign investments. Market estimates suggest that this inclusion could attract an initial inflow of US$20 billion to US$40 billion, escalating to a staggering US$180 billion over the next decade. This influx of foreign capital is poised to significantly lower the cost of government debt issuance, thereby freeing up substantial resources for the private sector.


The broader implications

  • Enhanced liquidity and lower borrowing costs: The inclusion is poised to attract significant foreign investments, thereby enhancing liquidity in the bond market. This influx of funds is expected to drive down yields, subsequently reducing the borrowing costs for the Indian government.

  • Strengthening of the Rupee: The anticipated inflow of dollars due to the buying of Government Securities (G-Secs) will likely bolster the Indian Rupee, offering stability against major global currencies.

  • Positive outlook for financial entities: The equity market, especially banks, NBFCs, and leveraged companies, stand to benefit from this inclusion.

  • Increased foreign investment: Historically, foreign investors have owned less than 2% of the outstanding Indian government debt. This inclusion could potentially amplify foreign investment, further integrating India into the global financial ecosystem.

  • Easing of borrowing pressure: In the aftermath of COVID-19, India grappled with an elevated fiscal deficit due to increased borrowing. The inclusion in J. P. Morgan's index is expected to alleviate this borrowing pressure, as a significant portion of the borrowing will be absorbed through this route.

The bond market, often overshadowed by the equity market's allure, is an indispensable component of India's financial fabric.

The recent developments in India's bond market beckon a closer examination and a nuanced understanding for discerning investors.