The East India Company played a huge role in bringing the concept of public borrowing. The East Indian Company started borrowing during the eighteenth century to finance its campaigns in South India. The debt which was owed by the government to the public was referred as the public debt. Debts are taken from public with the view to meet the deficit in revenue of the government.

In India, the first borrowing was made in 1867 for the purposes of railway construction. Apart from that a rise in public debt was also encountered during the first world war. Interest rate of bonds varied in India from time to time. In 1857 it came down to 5% and gradually to 4% in 1871.

Bonds are regarded as securities under Section 2(h) of the Securities Contract (Regulation) Act, 1956. Bonds could be referred as loans provided by investors to the organizations. Bonds have interest rates at which they are redeemed after a certain maturity period. The borrower has obligation to pay interest on the principal amount. The interest is termed as coupons in the Indian Bond Market. There are various types of bonds which currently exists in the Indian Bond Market.

The plain vanilla bond is the simplest amongst all bonds. The bonds that currently exists are callable bonds, puttable bonds, zero coupon bond, amortizing bond, zero coupon bond, floating rate bond, government securities, and corporate bonds. The study would be focused on an overview of the Indian Bond Market. Apart from that a comparison between Indian and US bond market would also be drawn to acknowledge recommendations.

Bonds and its types

The bond market has seen significant changes with the emergence of liberalization in India. it has influenced several foreign investors to hold 30% of financials in the bond market of India . The bond market plays an immense role in raising funds by government and companies for expansion. The understanding of different types of bonds would be helpful in acknowledging the purposes of adapting each bond significantly.

Plain vanilla bond

Plain vanilla bond is the simplest form of debt. It requires the periodical payment of interest at a fixed rate. The principal amount is required to be returned with the maturity of the bond . This type od bond also allow slight variations in redemption price or make changes in the payment of frequency of interest quarterly, monthly, or annually.

Zero coupon bond

Zero coupon bond are such that they do not pay any coupons during the period of bond. This kind of bond is issued at a discount to the face value and redeemed at face value. The benefit gained from this kind of bond is the discounted price in face value and its difference with face value price while redeeming . Especially, in this kind of bond there must be no intermediate payments of coupon during the term of bond.

Floating rate bond

Floating rate bonds could be regarded as those bonds in which the interest rate is not fixed. In this case a pre-determined benchmark is considered, and the interest rate is re-set periodically. These are also known as variable rate bonds and adjustable rate bonds. The referred terms are used only in cases when the coupon rates are set at longer intervals.

Callable bonds

Callable bonds are of such nature that it allows the issuer to redeem the bonds before the original maturity date arrives. These kinds of bonds have call option in the contract which provides the issuer to make alterations in the period of the security. The main disadvantage in this kind of bond is that the investor might lose his position to secure higher interest. This is because the issuer might call bonds while the interest rates decline and then re-issue fresh bonds at lower interest.

Puttable bonds

Puttable bonds provide the investor a right to redeem bonds before its actual date of redemption. This is opposite from callable bonds because the investor has discretion to exit the bond at any point of time . The investors could exit from low coupon bonds and invest in high coupon bonds.

Amortizing bonds

Amortizing bonds refer to those bonds where the principal is not repaid when the bond matures. Payment is made periodically within the life cycle of bond. These periodic payments include both the interest and principal amount. Home loans, auto loans, and consumer loans are some examples of amortizing bonds.

Government securities

Government securities are those that include government bonds issued by governmental bodies at various levels. Government securities also known as G-secs include central governmental bonds, quasi-government bonds are issued by state, local, and municipal governments. Investment in government securities are secured because they could be considered free of default or credit risk . The government has authority to increase taxes for the purpose of meeting its obligations. Apart from that they could also borrow easily from others or print notes to repay the debts in extreme cases.

Corporate bonds

Corporate sector debt includes two sectors namely, the public sector units and private corporate sectors. The Corporate Bond Market is usually comprised of short-term commercial papers and long-term commercial papers. Certificate of deposit which comes under corporate bond market are short term debts issued by banks . The rate fixed by corporates, banks, and institutions depend upon the credit quality of borrower. The default risk or credit risk is measured by credit rating of the bond. If the credit rating is higher then the risk of default becomes less.

Advantages and disadvantages of bond market

There are various benefits and risk of investment in the debt market. However, the risk element of debt market is separate from that of equity market . Most importantly, the rate of interest in debt market is determined previously by the issuer.

Advantages of bond market

Income is fixed:
Bonds have pre-decided coupon rates mutually agreed between the issuer and investor. This coupon rate is foxed at the time when issuance is made. The period of payment of interest is decided by entering a debt contract. Therefore, the issuer is obliged to pay interest unlike equity where the variables are not fixed . Bonds are ideal for persons who have interest in incurring less risk.

Fixed period:
The debt is held for a stipulated period in case of bonds. As soon as the principal amount has been repaid to the investor, the security strives to extinguish.

Bonds as a source of income:
There are several types of investments available in the market. Bonds amongst such forms of investments could be considered as the most reliable source of income. This is because the rate of interest is pre-determined in case of bonds . Even when the interest rate is low, investors could invest in high yield bonds to earn.

Diversifications:
Bonds are a secured mode of investment. It helps in reducing the risk and preserve the capital for a longer time. The amount of risk is less in case of bonds and return is higher. This helps the equity investors to preserve their capital at times when the market is falling.

Preservation of principal:
Investors who have the need to preserve their capital for a fixed period are the best persons to invest in bonds. Stocks or equity have high volatility than bonds and hence the preservation of capital could not be made.

Tax advantages:
There are certain types of bonds which enables to get tax advantages. For instance, a municipal bond is tax free bond. Investors mostly opt for government bonds to get tax advantages.

Disadvantages Of Bond Market
Lower returns in case of inflation:
Returns received from returns are fixed and predictable. However, loses could be incurred when the inflation rate rises than the percentage of return . For instance, if the coupon rate is 8% and the inflation rate rises above 8% then there rises a problem.

Default/credit risk:
Credit risks persists when the issuer makes defaults in payments of interest or the principal amount. The only advantage lies in case of government bonds. The default risk could be avoided if invested in government bonds.

Risk of reinvestment:
There are certain debt securities which provides the option to choose between periodic payment of interest and re-investing . Risk arises before the investors when they pull out the interest and face problems in investing in same coupon or higher than that.

Call Risk:
This type of risk persists in case of callable bonds. The issuer has the option to call bonds at lower interest and re issue debts at lower interest rates. This leads the investors to reinvest in lower interest rates.

Risk of liquidity:
Stock market is different from bonds in terms of liquidity. Bonds are not as flexible as equities. The dominance created in the secondary market created by the institutional investors creates difficult for small investors to sell bonds. This results in holding of bonds by investors till they reach the maturity date.

There are three limitations:

• The price of bonds increases if the market rates goes down. This creates difficulty in selling of bonds at higher price
• In case the rates rise then the investors face difficulty in switching to higher rates bond
• The decrease in credit quality increase the credit risk

Difference between bonds and stocks
Since, 1926 the big companies have provided investors annual return of 10% on average. Whilst the government bonds have provided annual return between 5 to 6% on average. The main difference between stocks and bonds is the risk appetite. Generally, the younger generation have the tendency to take more risk than the older generation.

Apart from that both the different from each other because of their nature. Bonds are more income oriented whereas equities are more growth oriented. Investors who seek to make earnings on a regular basis and require cash for their case might invest in bonds. On the other hand, investors who have could be comfortable with irregular payments get inclined towards equity investment.


Debt instruments like bonds have certain period of maturity which lies between 7 days to 30 years. Investors who are interested in investing for short period of time might invest in bonds whereas equity investment provide long term benefit mostly. However, day to day trading is also done in equities. In short term equity investment, the risk is much higher due to fluctuations in prices.

The most important difference between bond and equity is the risk appetite. Debts instruments are more stable than that of equity. Bonds carry risk only in default of paying interest or principal amount. On the other hand, equity does not assure any return in the principal invested.

Unlike bonds there is no pre-agreed rate of interest between the issuer and investor. If a company is sound and healthy then it provides profit. In case the company fails to maintain its sustainability then there is loss. The risk of investment in case of equity is much higher than that of bonds.

Lastly, investors who are willing to keep continuous review of their investments mostly prefer equity. In case of bonds, the investors tend to buy and keep such instrument till maturity.

Development of Indian Bond Market
The emergence of liberalization in India has impacted the bond market majorly. With liberalization there has been complete evolution of the bond market and has been rapidly increasing ever since. The Indian debt market includes both government as well as corporate bonds. However, liquidity of government bonds is more feasible than that of corporate bonds.

With the emergence of liberalization, doors have been opened for global market to invest in debt and semi-debt instruments. For instance, Euro bonds and Foreign Currency Convertible Bonds (FCCB) are also available for trading in India. Indian issuers have the availability of the Floating Rate Notes to bring liquidity in the market. Floating Rate Notes provides the investors to avoid losses while the interest rates go high . It rather helps in keeping a balance for the purpose of maintaining its value.

Government bonds have significantly impacted the bind market to develop steadily. It has helped in creating an increase in supply, bringing reforms, and enhance infrastructures. The Indian government have been borrowing since 1990 has grown rapidly over the year. There was an increase in 5% of the GDP in the fiscal year 2001-2002.

Since then the growth process has remained strong in the Indian economy. As per the report provided by Asian Development Bank in 2008, the economy has risen in India by 8.5% annually for the past four years . However, due to the current pandemic Covid-19 in the year 2020, economy has drastically contracted to 23.9% .

Trading of bonds in India is done electronically through Negotiated Dealing System-Order Matching Segment (NDS-OM). Apart from that over the counter (OTC) trading is also made for some transactions. In the year 2007, the Securities and Exchange Board of India (SEBI) had launched certain initiatives to make sure that comprehensive reporting is done for over the counter trade.

To ensure fairness and transparency, the Securities and Exchange Board of India provided a new circular in the year 2014 . OTC trading is mostly done in cases of corporate bonds as they do not have liquidity like government bonds.

Securities and Exchange Board of India had taken the statutory power since 1992. It has strived to make developments in the discipline of capital market. The equity market was much more liberal than that of the bonds market. In 2005, which indicates that after 11 years of the equity market, the bond market was made as an electronic order limit market.

In today's date the Indian Bond Market is traded electronically and greatly monitored by legal authorities. The Indian Bond Market is governed by the Securities and Exchange Board of India. SEBI received its statutory powers in the year 1992 from the Securities and Exchange Board of India Act, 1992.

Recommendations
The Debt Market which is also regarded as Fixed Income Securities is one of the earliest securities markets in the world. It has helped in empowering economic growth over the years. The debt market is the largest capital market in the world. The debt market could be regarded as the pillars of Indian economy. The Indian economy which has risen by more than 7% per annum since the past decade and growing in fast pace could meet the requirements of resources from a strengthened market.

Government securities or G-secs are the oldest and one of the largest traded securities in the Indian Market. they play an especially important role in strengthening the Indian economy. They strive to set a benchmark of interest rate through the yields in government securities. G-secs are risk-free rate of return in any economy. Though retail investors focus more on government securities yet there is another market for corporate debt papers which are for short period.

The retail debt market has huge opportunities for retail investors who does not have ample knowledge to enter equity market. More than 40 million investors have entered the debt market. stock exchanges like the Bombay Stock Exchange carry out various campaigns to create the retail debt market. The retail debt market was prevalent in India through the forties, fifties, and sixties. Currently, there is a requirement to create a change in the portfolio and include debt instruments like bonds.

This is because due to the volatility in the equity market, investors would require a fixed income return which could mostly be availed from the Indian Bond Market. The debt market in India is dominated by Government Securities. It holds almost 50-70% of the trading volumes . The outstanding value of G-secs is around 90-95% in the Indian market.

Bonds are more predictable than that of equity. This is because they provide interest periodically or annually unlike equity who might end up incurring losses or yield when invested for a longer term. By making investments in bonds, investors could preserve their capital and receive predictable interest income. Apart from that bonds also help in creating diversification in the investment portfolio. The reason being bonds consider predictable returns they could be sought for retirement planning.

While the economy has been seeing downward trends, bonds are a secured place for investment. However, in comparison with other economies across the globe like US, Japan, Korea, and China Indian Bond Market requires a lot of funding and investment. In the year 2010, the size of Indian Bond Market was approximately equivalent to 27% of the Chinese bond and 29% of the Korean bond .

Conclusion
From the discussed it could be identified that corporate bond market is quite smaller in India as compared with India and other Asian economies. Liquidity in the corporate bond market could mitigate the problem easily. According to the reports provided by the Securities and Exchange Board of India in 2012 the outstanding corporate bonds amounted to 9 trillion and contributed almost 10.5% in the GDP. India has been more focused towards banking system and other financial institutions.

Corporate bonds have lagged because of their narrow investor base, unavailability of access for small and medium enterprises, high costs of issuance, and lack of liquidity in the security market. Investments in bond depends upon the goal an investor seeks to achieve.

It is important to keep diversification for the purpose of meeting various needs. Investments in one basket could lead towards a greater risk and low returns at times. Thus, it could be conclusively determined that choosing of different bonds with various maturities helps in managing risk and meeting of cash flow needs.

Award Winning Article Is Written By: Ms.Soumi Saha

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