Blog: Opportunities ahead for the Indian Fixed Income Market

The Indian fixed income market, which is one of the largest in Asia, is developing rapidly based on a number of factors including new instruments, increased liquidity, deregulation of interest rates and improved settlement systems. It is expected that Indias bond market will bli included in the global indexes in 2022-2023.

The major players in the Indian fixed income markets today are banks, financial institutions, insurance companies, foreign Institutional Investors, and mutual funds.

The size of the Indian fixed income market is more than 2 100 billion USD, where 50% is Central government bonds, 25 % is State government bonds, 21 % is corporate bonds, and the rest a mix of T-bills plus commercial papers.

The credit rating for India is Investment Grade with stable outlook. S&P have India at BBB-, Moody’s at Baa3 and Fitch’s BBB-. Compared with the western world and a central bank interest rate of 0 %, the central bank interest rate of India is at 4 %, and the 10 year government bond rate at 6,75 %.

The government bonds market has a large daily trading volume with instrument ranging from short, dated Treasury Bills to long dated securities extending up to 30 years. The Corporate bond market which even though it is less liquid, is fast developing with an increased participation from the banks, financial Institutions, mutual funds, provident funds, insurance companies and cash rich corporates.

India is now approaching a large milestone for its bond market, entry into a number of the larger indexes for global debt. Both JP Morgan Chase and FTSE Russell is expected to introduce Indian bonds in 2022 – 2023.

Entry into to global indexes and thereby increasing the holding from foreign investors is essential for the future growth of both the Indian financial market and its economy. It would help with funding gaps, lower public-borrowing costs and potentially strengthen the rupee, expected at levels of 30 – 40 billion USD.

Peers in the BRICS (Brazil, Russia, India, China, South Africa) are all a part of the global bond market, where f. ex. Brazil have a share of 44 % and South Africa 35 %. Picture 2 show the comparing between a number of the emerging countries, where India is lagging with just 2 %.

The entry is however dependent of tax changes, which was not addressed in the budget of FY23 (01.04.22 – 31.03.23). The Indian Government and the Reserve Bank of India have later addressed this , stating that they are taking a “very calibrated approach” on the issue, and that it will be solved.

Considering Chinas entry into the global bond indexes, it took foreign ownership from 7,6 % to 11 % in three years. So, an opening for taking Indian bonds into global indexes would be positive for the market, most likely in 2022-2023.

 Source: JP Morgan and Morgan Stanley