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Indian investors love fixed income, and equity. Bonds, however, have not made the cut yet. The discomfort to invest in bonds is further accentuated due to lack of information and illiquidity. Having twin regulators at the helm— with the Reserve Bank of India (RBI) supervising government bonds and market regulator Sebi overseeing corporate bonds—has not helped active market reforms. Even today, simple information like yield and interest— that is inbuilt but not paid —is not displayed at exchanges where small lots of bonds trade.
To increase retail participation, RBI launched the government bond portal, enabling investors to buy government bonds for as low as ₹10,000. Sebi also came out with a regulatory framework for online bond platforms and guidelines to cut the minimum face value of corporate bonds to ₹1 lakh. But these measures would still be counted as piecemeal approach.
One of the ways to make it work is by acting in a holistic manner —addressing most of the underlying root causes of poor bond market dynamics in India. And, this would not be very hard if there is consensus among all stakeholders including regulators.
The comfort of deposits is a result of ease of transaction and low minimum amount. Currently, bonds have a starting face value denomination of ₹1,000. Regulators should attempt to bring down face value of every fixed income bond to ₹100. The next step would be to do away with multiple accounts and module registrations. Regulators should work to migrate to single issuance mode, preferably demat. India has one of the best market infrastructure that has been already tested and used extensively—a combination of trading, demat and bank accounts. These, along with a facility like ASBA (applications supported by blocked amount) can be used very efficiently to create ease of access.
Another step is to increase awareness among investors and improve transparency. Exchanges and online bond platforms should be directed to show clear information including rating, type, price/ yield linkage, interest inbuilt but not paid, simple calculator to arrive at settlement amount at a particular price or yield. Also, the price and trade history of bonds should be made easy with the option of filtering the historical market data as per different variables like bond type, issuer, ISIN (International Securities Identification Number) etc.
The last and most important step is to increase the two-way activity and depth in bond markets. There could be three ways to approach it. Firstly, try consolidating bond issuances in fewer ISINs. RBI has done an excellent job in consolidating all outstanding government bonds into just 100 ISINs. But it has not been able to replicate the same success in state government bonds. Corporate bonds have completely faltered in this area.
Second, appoint top government and corporate bond arrangers as market makers with the main aim of providing two-way quotes for bonds in lower tick sizes. The market makers would also need to be adequately incentivized while being under constant monitoring and supervision by RBI and Sebi.
Lastly, the current market structure is very asymmetrical in India. Most of the large participants such as LIC, other insurance companies, EPFO, NPS Trusts, PF amd other retiral trusts are ‘hold to maturity’ investors. while very few participants such as mutual funds and banks are active investors. This equation results in poor market-making and illiquidity in secondary markets. Creating a favourable regulatory framework for all participants to buy and sell seamlessly, along with promoting the ecosystem of fixed income-oriented PMS’s, AlF’s, credit and structured debt funds, could help in tilting the balance favourably.
To summarize, a holistic approach can help overcome the years of inertia seeded in investors to buy bonds in India, once and for all.
Bhupendra Meel is a portfolio manager in the private banking division of a multinational bank.
The views expressed in this column are personal.
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