Bonds - Another Growth Story?
Understanding and Navigating the Indian Bond Market
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This week, we're diving into the fixed-income market in India. Join us as we break down the numbers and stats, unveiling the interesting stories behind them. With a focus on innovation and emerging product opportunities, we aim to provide you with a deep understanding of this dynamic market.
💰 The Indian Bond Market: A Statistical Dive
India's bond market has witnessed remarkable growth in recent years, becoming an integral pillar of the nation's financial system. This market consists of government securities in a substantial two-thirds portion, highlighting their significance. Corporate bonds, though smaller in volume, are gaining momentum, offering varied investment opportunities.
Let's delve into the numbers.
In the last five years, the total bond market value has surged over 77% to ~USD 2.3 Tn in the financial year (FY) 2023 from ~USD 1.3 Tn in FY18. In FY24, the total value of outstanding bonds in the Indian market will stand at ~USD 2.5 Tn as of September 30, 2023. (Source: SEBI & CCIL)
From FY16 to FY23, the corporate bond market experienced steady growth, increasing from ~USD 240 Bn to ~USD 600 Bn, reflecting the market's resilience and potential.
As a percentage of GDP, the corporate bond market declined to 15% in FY23 from 18.2% in FY21. However, this decrease can be attributed to higher nominal GDP, indicating a larger economy as a contributing factor.
Trading in corporate bonds demonstrated an impressive 8.2% Compound Annual Growth Rate (CAGR) from FY15 to FY22, maintaining its upward trajectory despite a contraction of 11.9% in FY22.
✨ What is creating the excitement here?
Formalising online bond platforms: Licensing brings regulatory oversight, increasing investor confidence in the security and legitimacy of online bond platforms.
Mandatory settlements through exchange: The move towards mandatory settlements through an exchange signifies a more standardised and efficient process, reducing risks in bond transactions.
Reduced minimum ticket size for primary investments: The lowered minimum investment threshold to Rs. 1 Lakh makes primary bond investments more accessible to a broader range of investors, fostering inclusivity.
UPI limit increased to Rs. 5 Lakh: The higher UPI limit facilitates larger transactions, making it more convenient for investors and potentially attracting more significant investments to the bond market.
🌍 Global Players in the Indian Bond Market
Exciting news awaits the Indian financial landscape with the upcoming inclusion of India Government Bonds (IGB) in the JP Morgan Emerging Markets Bond Indices, scheduled for June 2024. This development showcases the growing recognition of India's bond market on a global scale.
The JP Morgan Emerging Markets Bond Index currently holds approximately ~USD 236 billion in Assets Under Management (AUM). The inclusion of India in this index carries substantial weightage, estimated at 10%. This translates to one-time inflows of approximately ~USD 23-25 billion, marking significant international investment in the Indian bond market.
These anticipated inflows are expected to enter the market in a staggered manner, at around 1% per month from June 2024 until March 2025. This phased approach will help manage the impact of the inflows and allow for a smoother integration into the Indian bond markets.
Naturally, this inclusion of Indian Government Bonds in the JP Morgan Emerging Markets Bond Indices will have several effects on the bond market:
👍🏼 The Ups
Forex reserve boost: The inflows from foreign investors contribute to the country's foreign exchange reserves, strengthening India's external position.
Increased acceptability of Indian bonds globally: The inclusion in a prestigious global index enhances the credibility and acceptability of Indian bonds among international investors. This can lead to increased demand and liquidity for Indian bonds.
Yield curve softening and bond market deepening: The increased demand for Indian bonds can potentially lead to a softening of the yield curve, making borrowing costs more favourable for both corporates and the government. Additionally, the deeper participation of global investors can contribute to the overall depth and liquidity of the Indian bond market.
👎🏼 The downs:
Higher volatility: The significant inflows from global investors can introduce higher volatility in the Indian bond market. Market participants and regulators must manage this volatility effectively to minimise potential risks.
Prudent macro policies required: The inflows of foreign investment need to be sterilised to ensure that excessive liquidity does not lead to inflationary pressures or disrupt the domestic monetary system. This includes ensuring appropriate fiscal discipline, managing inflation, and maintaining a conducive investment environment.
🔑 Key Areas of Innovation
The new regulations give rise to exciting times for the Indian Bond Market and its growth. Hence, it is crucial to explore the various whitespace and opportunities that exist in the fixed-income space.
Distribution Tech for Fixed Income
The distribution of fixed-income products has traditionally been a complex and opaque process. However, technology-driven solutions can transform and streamline the distribution landscape, making it more accessible and efficient for retail. Startups focusing on digital platforms, marketplace lending, and AI-driven distribution algorithms have immense potential to disrupt the market and enhance investor experience.
Brokerage Platforms for Bonds
The evolving fixed-income market presents significant opportunities for digital broking firms to emerge. By providing a digital marketplace for bond trading, these platforms can increase transparency, liquidity, and efficiency in the market.
Debt Bundled products for Balancing
Exchange-traded funds (ETFs) and Mutual Funds (MFs) have gained popularity among investors due to their diversification benefits and ease of access. In the fixed-income space, bundling bonds can provide investors with a balanced and diversified portfolio. Startups can focus on creating innovative bundled debt or debt-equity products that combine different types of bonds to cater to diverse investor preferences.
Green Bonds for Corporates and Electrification Enablers
As the world shifts towards sustainable practices, the demand for green bonds is rapidly increasing. Green bonds are fixed-income instruments specifically issued to finance environmentally friendly projects. Startups can tap into this growing market by facilitating the issuance, distribution, and investment in green bonds. Additionally, technology-driven platforms can enable Electric Vehicle (EV) financing through green bonds, unlocking opportunities for sustainable transportation. The regulations would have to evolve further.
Credit Against Bonds
With the substantial size of the bond market, there is a significant opportunity for startups to provide credit against existing bonds. These credit products can enable bondholders to unlock the value of their bonds by accessing liquidity without selling them. This innovative approach can attract retail investors and expand participation in the fixed-income market.
Equity and Bond Portfolio Hedging
Managing the risk of simultaneous exposure to equity and bond portfolios is crucial for investors seeking balanced portfolios. Startups can develop sophisticated hedging solutions, like Credit Default Swaps (CDS) that enable investors to mitigate risks stemming from fluctuations in both equity and bond markets.
💸 The Way Forward: Innovation Meets Progress
As we explore the whitespace and emerging opportunities in the fixed-income market, innovation stands at the forefront. At Eximius, we believe that startups in the fintech space have the power to transform the bond market, making it more accessible, efficient, and transparent.
We’re actively looking for founders and ventures who align with our thesis, focused on building groundbreaking solutions within risk management, trading platforms, yield analysis, and other related areas.
If you're venturing into the world of bonds or have innovative ideas in this space, we're eager to hear from you. Reach out to our Investment Associate Shriya Bhandari at shriya@eximiusvc.com or on LinkedIn.
We’d love to hear your thoughts on the newsletter. Hope you enjoyed it and we look forward to writing to you again next week!
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