Bond Market Trends: What Investors Need to Know in Today's Economy?
Bonds form a investment avenue, especially for those looking to create a regular and steady source of income. If you are one among them, we welcome you to the world of bond investments! However, what matters is whether you make an informed decision or go by the general market sentiment. Accordingly, before investing in any bond, be it corporate or government, you should know a few aspects associated with the Indian bond landscape. Fundamentally, the idea is to know how well bonds have been faring and what the future holds for you.
Bonds and their Economic Significance
A bond, as you would already know, are debt, fixed-income investment options that involve buying and selling debt instruments. They work as a financial boost to governments or companies looking to raise funds for various objectives like geographical expansion, equipment purchase, project completion, infrastructure development and more. However, bonds have a much broader role than being merely fund-raisers. Let’s quickly review the role bonds play in an economy.
- Implementing Fiscal Policies
One of the uses of bonds in a country’s economic policy is controlling money supply and interest rates. Central banks engage in buying and selling government bonds to influence the money supply. Thus, when they buy bonds, they supply money to the economy, thus reducing interest rates and fostering borrowing and spending. On the other hand, when they sell bonds, they reduce the money supply and thus control inflation.
- Providing Investment Options and Opportunities
Individual wealth also plays a significant role in a country’s economic development. Bonds are a popular investment option in this regard. They work as investment avenues for institutional investors, foreign governments and individuals, who invest money, the collaborative value of which can be in billions.
While governments and companies get money to serve their needs, investors receive periodic interest payments and a return of principal at maturity. Thus, people looking for a steady source of income and portfolio diversification can consider investing in bonds.
- Setting Benchmark Interest Rates
Additionally, government bonds often work as benchmarks for other interest rates across an economy. An example of this can be mortgage rates and corporate bond yields being usually tethered to government bond yields. Thus, a government bond’s pricing and yield influence borrowing costs for the masses and affect the overall economic landscape.
- Stability and Security
Bonds, especially government bonds are usually considered low-risk investments as investors typically have more faith in the credibility of a government. That’s because they potentially safeguard people’s investments even during recessions or significant market fluctuations. Such stability helps maintain the investor’s confidence in the financial system and supports economic stability.
Now that we’ve overviewed the role of bonds in a country’s economy, let’s see how bonds have been faring in the Indian market.
Indian Bond Market – Overview
As of September 30, 2023, the Indian bond market is valued at Rs. 205.3 lakh crores, which is nearly USD 2.5 trillion. So, imagine the money bonds generate for the Indian economy! Out of the Rs. 205.3 lakh crores, about 78 per cent of it are government bonds with a value of Rs. 161.1 lakh crores. The rest is corporate bonds with a value of Rs. 44.2 lakh crores.
The value registered until September 2023 denotes a significant increase in bond investments compared to the last financial year. In FY 2023, the total bond investment amounted to Rs. 192.4 lakh crores. So, the net increase, as you can easily calculate, is nearly Rs. 12 lakh crores.
According to views expressed in a Business Today article, bond market veteran Vishal Goenka, the co-founder of IndiaBonds.com, the last five years from FY 2017-2018 to FY 2022-23 have witnessed an overall bond market growth of 77 per cent.
The government bond market experienced a growth of 85 per cent and on the other hand, the corporate bond market grew by 53 per cent. One of the reasons for the slowdown in the corporate bond market was the credit crisis that emerged the country faced from 2018-2021. The period was dotted with many corporate defaults, especially in the NBFC and in the metals/mining manufacturing sector.
Bond Market in 2024 – What in Store this Year?
Experts like Goenka when interviewed by Business Today, anticipate rate cuts from RBI this year, owing to a decline in the inflation trend globally, and also the US Fed, which in its latest policy, indicated that they may see two to three cuts while being data dependent.
Indian interest rates have remained devoid of the US market for some time now. The last hike in rates from RBI was in Feb 2023. Since then, it has been steady. The last CPI reading also exhibited a higher print. Domestic growth came in at 7.6 per cent for the first quarter of 2023.
However, if data would drive RBI cuts, the market may see the rates of many short-tenure (three to five years) bonds decline faster than those with a longer duration. Considering that we are at the apex of interest rates in India, individuals should leverage this time to invest in fixed-income products to earn consistent returns in the next few years.
The Near Future of the Indian Bond Market
India’s bond market is expected to expand considerably. A CRISIL report suggests that by March 2025, the market may witness the volume of corporate bonds doubling to approximately Rs. 65-70 lakh crores! Ongoing innovations and foreign capital investment will likely foster this growth. However, one must note that foreign investment will have to be introduced to fill the projected gap of Rs. 5 lakh crores between market supply and demand.
Factors Driving the Growth of the Indian Bond Market
With these mind-boggling figures on your screen, you must be wondering about the growth the Indian bond market has achieved and is set to achieve in the near future. Some potential reasons include the following.
- Economic Expansion and Growth
The past few years have been phenomenal for India from the economic growth perspective. India has sustained healthy economic growth, which, in turn, has created a favourable environment for the bond market. Additionally, rising incomes and increasing awareness amongst investors to diversify are driving the need and demand for fixed-income investments.
- Infrastructure Investment
Another noteworthy reason driving the bond market’s growth is continuous and massive infrastructure investment. In the last few years, the government has invested heavily in public infrastructure throughout the country. The construction of new airports, bridges, highways, and other public infrastructure is paving the way for more investment opportunities.
- Regulatory and Policy Reform
Regulatory elements are a crucial dimension of every economy. The stronger and more conducive the regulatory framework, the more convincingly the economy grows. One such change is the introduction of electronic trading platforms and various measures to enhance market transparency. These aspects are helping the government instil confidence among investors and encouraging them to invest in bonds.
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Disclaimer: The contents of this article should not be construed as tax or financial advice. Readers should seek advice from their tax or financial advisor before making any investment decision.