Bond Market-Growth and Challenges

A sponsored feature article by Standard Chartered Bank in association with CNBC-TV18 under the India on the Move series (Season 5), a consumer awareness initiative

BRAND CONNECT | PAID POST
Published: Sep 6, 2021 12:46:09 PM IST
Updated: Sep 7, 2021 12:26:20 PM IST


Timely government intervention and RBI’s role are crucial to scaling the Indian Bond Market which stood at $13.7 billion even as Asian peers saw record inflows.  Discussing the imperatives for growth in the Indian Bond Market, Mridu Bhandari, Special Correspondent, CNBC-TV18, engaged with a panel comprising Parul Mittal Sinha, Head, Financial Markets, India and Head, Macro Trading, South Asia, Standard Chartered Bank, Lakshmi Iyer, CIO, Kotak Mahindra Asset Management, and Suyash Choudhary, Head-Fixed Income, IDFC Asset Management.

In view of the increased activity on the supply side in the bond market, Parul opined over the widening gap between the demand and supply situation in the financial year 2022, which is to the tune of almost Rs. 3L crore after accounting for GSAPS (G-Sec Acquisition Programme) and an additional Rs. 1.6L crore is anticipated by the bond markets. This would require RBI’s support by continuing GSAP purchases and Operation Twist to ease the mismatch, which has led to the pricing of approximately 50 basis points of discount in the yield curve.

Alluding to Parul’s view of the bond market, Suyash spoke about the changing RBI stance on market yield, which has been revised to 6.1% p.a for the new 10-year bond. According to Suyash, during the first and second COVID-19 wave, the Central Bank moved from orderly evolution to the yield curve and finally settled at some sort of yield control, particularly at the ten-year point. The slow economic revival points towards RBI allowing for a gradual increase in yield over a period of time basis the inflation vs growth trade-off.

Speaking on RBI’s opening up of the government securities market to retail investors and its impact, Lakshmi stated that it is a welcome move that will go through a gestation period before showing any visible outcome.  She further adds that this is going to be a good option for the informed investor, though not without the interest rate volatility that accompanies this investment route. Additionally, Lakshmi elucidated ways to counter retail investor anxiety by awareness building, engaging professional investment services, and taking the aid of newly refined risk-o-meters made available by most fund houses.

Touching upon the topic of Foreign Portfolio Investors’(FPIs) departure from the Indian markets, Parul cited the reason of lower real returns, where post COVID-19, India’s inflation trajectory has moved up in comparison to other emerging markets.

Suyash further explained investor behaviour with regards to the decrease in the appetite for Fixed Mutual Plans (FMPs). He explained the cyclical nature of these products, increased market volatility, savings compromised on account of the pandemic and introduction of innovative financial investment options.

Talking about the interest rate effect on growth and sustainability, Lakshmi sounded bullish on any further decline in rates, she clearly quoted “Incremental rate easing is ruled out for now, gradual normalization giving way to tightening over the next three to four quarters could well be the way forward”

The discussion veered towards the inclusion of India in the global bond indices, commenting on which Parul exclaimed an optimistic view and on a positive note quoted “Our strategists estimate that in the short-term once the inclusion goes live over a period of 12 months, we can expect anywhere from $35 to $40 billion inflows and this can essentially help wipe out the demand-supply mismatch that currently exists”.

Wrapping up the session with a clear wish list for the regulator to ensure a vibrant bond market, Suyash spoke about the need to rationalize public market businesses, incentivize financialization of savings, and capital base expansion.

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