When it comes to the bond market, India still has a long way to go compared to countries like the US and China. Corporate bonds make up a relatively small share, and retail participation is still limited. So, what are those issues holding back India’s bond market? Are they regulations, lack of awareness, or just investor habits? As the country looks ahead to the next phase of financial evolution, the role of bonds in capital formation and wealth creation will be critical.
Lakshmi Iyer, CEO – Investment & Strategy at Kotak Alternate Asset Managers, shared her views on the road ahead for India’s bond market. She gave her perspective on everything from policy reforms and rate cuts to why younger investors should start paying more attention to bonds — and what needs to change to make that happen. Excerpts:
India’s bond market is still under $3 trillion, with corporate bonds accounting for just $600 billion. That’s way behind countries like the US and China. What’s stopping India’s bond market from growing faster? Are there deeper, structural problems?
India has been a land of savers. With the bulk of household money, finding its way into traditional modes of savings like bank deposits Indian bond markets still continue to be owned by domestic institutions like banks, insurance companies, and mutual funds – compared to other parts of the world, where there is reasonable household participation as well. The typical perception of a retail investor is that if he or she has bank deposits, it is equivalent to fixed-income investing. That mindset is gradually changing and with a favourable interest-rate regime, we could look at some enhanced participation in the near future.
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If we look five years into the future, what big changes — in terms of rules, trends, or policies — do you think will shape India’s bond market? Are there global success stories we can learn from to grow our market faster?
Indian sovereign bond market is extremely liquid in the secondary market. Even Indian corporate bonds have a reasonably vibrant secondary market, which is sufficient for retail/institutional investors to buy and sell. Indian sovereign bonds are also now available for retail investors to do direct transactions. Like we have the government bond market, which is an anonymous trading platform, maybe a similar kind of platform for corporate bonds can help augment liquidity with enhanced financial literacy, and we could see some enhanced participation of households in the Indian markets.
Corporate bonds are still a small part of the total bond market in India. How can we get more companies — especially NBFCs and mid-sized businesses — to raise money through bonds instead of always relying on bank loans?
While the Government of India is the largest borrower, Indian Banks are the biggest investors in such a category. NBFC’s and mid-sized firms do tap the market from time to time and with the advent of private credit funds through the AIF route we have seen many more mid-sized companies coming to access the market via bonds. It has created a reasonably active primary market for mid-sized firms and NBFCs and the trend is likely to continue.
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Not many retail investors are putting money into bonds yet. What are the main hurdles that stop everyday investors from investing and what can be done to make bonds more appealing and accessible?
The level of education has to be significantly notched up to ensure more retail participation. As reiterated earlier, retail investors tend to seek fixed returns while investing in fixed-income instruments, something which they are used to in bank fixed deposits. These instruments generate returns that are in line with market expectations of interest rate movements, there is also an added layer of credit risk in case one is considering non-sovereign options.
The perception that bonds provide steady returns but don’t create wealth like equities is common. What’s your take on this notion? Can bonds be a viable long-term wealth-building tool in India?
Investment in bonds is not for wealth creation its for stability and preservation of capital in your financial portfolio. It has to be used as a complementing strategy to your equity portfolio, which is a primary source of wealth creation in the long run.
Right now, corporate bond yields are following government bond trends, and borrowing costs remain high, especially for NBFCs. How is this impacting bond issuances? And are there any policy changes that could ease liquidity issues and help companies raise funds more easily?
The RBI has introduced a slew of measures and has proactively been conducting open market bond purchases (OMOs) to ease the liquidity situation. We are now in a much better liquidity condition than before and if this sustains, we could see the impact favourably on the bond yield curve as well.
Fixed deposits (FDs) have always been the most popular choice for Indian savers. But are we now seeing a shift? Are younger investors under 35 starting to show more interest in bonds, or is fixed income still mostly favoured by older, more cautious investors?
There is no such shift visible, at least for now. In fact, the very young investors are more attracted towards equities as they believe it is a very easy hack for creating wealth.
The benefits of asset allocation and diversification should be sensitised to all categories of investors, including the younger ones. This generation may not really find attraction in traditional modes of investments but would be more tolerant towards alternate asset classes as well. Fixed income is like lemon water, which can be consumed in all seasons, hot cold or at room temperature. It is a refresher and a stability provider to your portfolio.
Depending on one’s risk appetite, it could be a dominant portion or a tail end of your overall financial portfolio.