Fixed Income Market in India
Arjun Parthasarathy December 2010
Fixed Income Market
• Government Securities Market • Corporate Bond Market • State Development Loans
Government securities
• Government securities or Gilts are securities issued by the Central Government to fund their fiscal deficit • Gilts do not carry credit risk as technically the government can print money to pay back the lenders • Indian government is the largest borrower in the country • Government issues bonds from tenors ranging from 1 year to 30 years • The outstanding securities issued by the government is Rs 23,00,000 crores
Nature of government securities
• Dated (fixed and floating) bonds issued directly by the central government • Dated (fixed and floating) bonds issued by the central government in lieu of subsidies • Oil bonds, fertilizer bonds come under the indirect category • Indirect bonds bear Government of India (GOI) risk but do not qualify for statutory requirements and may not qualify for repo with the central bank
Investors
• Banks as they have to maintain 25% of their net deposit liabilities in government bonds • Provident funds, pension funds, trusts as they have to mandatorily invest in government bonds • Insurance companies due to mandatory investments • RBI when it does open market operations or lends to the government directly • Primary dealers, mutual funds, corporates invest with a view to make returns • Individuals can also invest in government bonds but participation is limited • FII limit for government securities is USD 10 billion
Government bond auctions
• Government raises debt by issuing bonds through auctions • RBI conducts the government bond auctions • Government bond auctions can be multiple price or uniform price auctions • RBI appoints primary dealers to underwrite government bond auctions • RBI issues an auction calendar at the beginning of every fiscal
Gilt market
• The Gilt market trades electronically as well as telephonically • The electronic market is the NDS-OM (Negotiated Dealing System- Order Matching) market run by the CCIL (Clearing Corporation of India Limited) • Trades are settled on a T+1 basis with CCIL as the centralised clearing agency • Telephonic market trades are reported on the RBI reporting platform the NDS and settled directly by the counterparties
Gilt yields
• Gilt yields are determined by movements in interest rates • Interest rates movements depend on factors such as inflation, government bond supply and demand dynamics, liquidity etc • RBI policy stance can also affect bond yields
Corporate bonds
• Corporate bonds are securities issued by private and public sector companies • Corporate bonds carry credit risk • Rating agencies rate corporate bonds according to the degree of safety of principal • Corporate bonds trade at a spread over the risk free government bond due to the inherent credit risk
Investors in corporate bonds
• Insurance companies, provident funds and trusts and mutual funds are the primary investors in corporate bonds • Investors look for the extra yield that corporate bond returns over government securities • Insurance companies, provident funds and trusts are mandated to invest in corporate bonds • FII’s have a limit of USD 20 billion for investing in corporate bonds
Corporate bond market
• Corporate bonds are traded telephonically and settled on a T+0, T+1 and T+2 basis • Corporate bond trades are settled through centralised clearing platforms run by NSE and BSE • Corporate bonds trade volume is much lower than government bond trade volumes • Corporate debt is raised through public issues or private placement of bonds
Corporate bond rates
• Corporate bond yields are determined by direction of interest rates and direction of credit spreads. • Credit spread movement depends on liquidity and rating movements • Perceived rating migrations play a higher part in determining corporate bond yields than current ratings • Corporate bond yield movements can be very volatile in times of liquidity and credit pressures
State Development Loans
• Debt raised by state governments through issue of bonds are called State Development Loans or SDL • RBI manages the state government borrowing • SDL’s carry credit risk • SDL’S are raised through state loan auctions and are usually in the ten year maturity bucket • Banks, provident funds, trusts, insurance companies are the primary investors In SDL’s
SDL market
• SDL’s are traded electronically and telephonically and settled on a T+1 basis • Electronic trading is done on the NDS-OM platform and trades are settled by CCIL • State loan yields are determined by interest rates movements, demand and supply dynamics and liquidity • Credit rating of the state also plays a role in determining state loan yields
doc_371192928.pdf
Arjun Parthasarathy December 2010
Fixed Income Market
• Government Securities Market • Corporate Bond Market • State Development Loans
Government securities
• Government securities or Gilts are securities issued by the Central Government to fund their fiscal deficit • Gilts do not carry credit risk as technically the government can print money to pay back the lenders • Indian government is the largest borrower in the country • Government issues bonds from tenors ranging from 1 year to 30 years • The outstanding securities issued by the government is Rs 23,00,000 crores
Nature of government securities
• Dated (fixed and floating) bonds issued directly by the central government • Dated (fixed and floating) bonds issued by the central government in lieu of subsidies • Oil bonds, fertilizer bonds come under the indirect category • Indirect bonds bear Government of India (GOI) risk but do not qualify for statutory requirements and may not qualify for repo with the central bank
Investors
• Banks as they have to maintain 25% of their net deposit liabilities in government bonds • Provident funds, pension funds, trusts as they have to mandatorily invest in government bonds • Insurance companies due to mandatory investments • RBI when it does open market operations or lends to the government directly • Primary dealers, mutual funds, corporates invest with a view to make returns • Individuals can also invest in government bonds but participation is limited • FII limit for government securities is USD 10 billion
Government bond auctions
• Government raises debt by issuing bonds through auctions • RBI conducts the government bond auctions • Government bond auctions can be multiple price or uniform price auctions • RBI appoints primary dealers to underwrite government bond auctions • RBI issues an auction calendar at the beginning of every fiscal
Gilt market
• The Gilt market trades electronically as well as telephonically • The electronic market is the NDS-OM (Negotiated Dealing System- Order Matching) market run by the CCIL (Clearing Corporation of India Limited) • Trades are settled on a T+1 basis with CCIL as the centralised clearing agency • Telephonic market trades are reported on the RBI reporting platform the NDS and settled directly by the counterparties
Gilt yields
• Gilt yields are determined by movements in interest rates • Interest rates movements depend on factors such as inflation, government bond supply and demand dynamics, liquidity etc • RBI policy stance can also affect bond yields
Corporate bonds
• Corporate bonds are securities issued by private and public sector companies • Corporate bonds carry credit risk • Rating agencies rate corporate bonds according to the degree of safety of principal • Corporate bonds trade at a spread over the risk free government bond due to the inherent credit risk
Investors in corporate bonds
• Insurance companies, provident funds and trusts and mutual funds are the primary investors in corporate bonds • Investors look for the extra yield that corporate bond returns over government securities • Insurance companies, provident funds and trusts are mandated to invest in corporate bonds • FII’s have a limit of USD 20 billion for investing in corporate bonds
Corporate bond market
• Corporate bonds are traded telephonically and settled on a T+0, T+1 and T+2 basis • Corporate bond trades are settled through centralised clearing platforms run by NSE and BSE • Corporate bonds trade volume is much lower than government bond trade volumes • Corporate debt is raised through public issues or private placement of bonds
Corporate bond rates
• Corporate bond yields are determined by direction of interest rates and direction of credit spreads. • Credit spread movement depends on liquidity and rating movements • Perceived rating migrations play a higher part in determining corporate bond yields than current ratings • Corporate bond yield movements can be very volatile in times of liquidity and credit pressures
State Development Loans
• Debt raised by state governments through issue of bonds are called State Development Loans or SDL • RBI manages the state government borrowing • SDL’s carry credit risk • SDL’S are raised through state loan auctions and are usually in the ten year maturity bucket • Banks, provident funds, trusts, insurance companies are the primary investors In SDL’s
SDL market
• SDL’s are traded electronically and telephonically and settled on a T+1 basis • Electronic trading is done on the NDS-OM platform and trades are settled by CCIL • State loan yields are determined by interest rates movements, demand and supply dynamics and liquidity • Credit rating of the state also plays a role in determining state loan yields
doc_371192928.pdf