Fixed income

market

Fixed
Government
income securities
securities

Fixed income securities market

Government securities:
These are securities issued by the Government for raising a public loan or
as notified in the official Gazette
RBI issues these securities on behalf of central government
Government uses these funds to meet its expenditure commitments

Features
Issued at face value
No default risk as the securities carry sovereign guarantee.
Ample liquidity as the investor can sell the security in the secondary
market
Interest payment on a half yearly basis on face value
No tax deducted at source
Can be held in Demat form.
Rate of interest and tenor of the security is fixed at the time of issuance
and is not subject to change (unless intrinsic to the security like FRBs Floating Rate Bonds).
Redeemed at face value on maturity
Maturity ranges from of 2-30 years.
Securities qualify as SLR (Statutory Liquidity Ratio) investments (unless
otherwise stated).
Segments
Primary Market: It consists of the issuers of the securities, viz., Central and
Sate Government and buyers include Commercial Banks, Primary Dealers,
Financial Institutions, Insurance Companies & Co-operative Banks.
RBI also has a scheme of non-competitive bidding for small investors
Secondary Market: It includes Commercial banks, Financial Institutions,
Insurance Companies, Provident Funds, Trusts, Mutual Funds, Primary
Dealers and Reserve Bank of India.
Corporates and Individuals can also invest in Government Securities.

State Development Loans:

State Development Loans (SDLs) are issued by the State Governments and
RBI coordinates process of selling these securities
The coupon rate for SDLs are slightly higher than government securities

Features
Sold through auction process
All auctions are multiple price auctions through competitive bid
Interest payment frequency are half yearly usually
Issued in both physical form and dematerialized form
These are traded in primary as well as secondary markets
There is no stamp duty payable incase of transfer

Treasury bills:
Treasury Bills are short term (up to one year) borrowing instruments of the
Government of India which enable investors to park their short term surplus
funds while reducing their market risk

Features
These are issued at discount and redeemed at maturity
When liquidity is tight in the economy, returns on Treasury Bills sometimes
become even higher than returns on bank deposits of similar maturity.
Individuals, Firms, Companies, Corporate bodies, Trusts and Institutions can
purchase Treasury Bills
Treasury Bills are available for a minimum amount ofRs.25,000 and in
multiples ofRs.25,000 thereafter
They are available in both primary and secondary market

Money market instruments:

Money or equalent instruments having high liquidity is traded

Features
Has high liquidity and very short maturity periods
It is a safe place to park excess funds for short term as they have high
liquidity
Common money market instruments includes
T bills
Certificate of deposits
Commercial paper
Repo and reverse repo

Corporate bonds
Corporate Bonds are issued by public sector undertakings and private
corporations for a wide range of tenors but normally up to 15 years

Features
Corporate bonds have higher default risk than government bonds
Risk compensation is made possible through providing a higher yield than
government bonds
Bonds with call option enables the issuer to redeem the debt before its
maturity date
Convertible corporate bond allows the investors to convert the bonds into
equity shares of the company

Role of debt market in Indian economy system:

Efficient mobilization and allocation of resources in the economy

Financing the development activities of the Government
Transmitting signals for implementation of the monetary policy
Facilitating liquidity management in tune with overall short term and long
term objectives.

Indian Bond market at a glance

Market size (in USD Bn)

5000
3900

4000
3000

Market size (in USD Bn)

2000
1000

1200

800

900

0
India

China

Korea

ASEAN-6

Bond markets in India is still in infancy when compared to

other Asian counterparts
Chinas bond market size is almost 5 times as Indias

Volume in government bond market

40,000

34,882

35,000
29,139 28,710

30,000
25,000

21,602

20,000

16,539

15,000
10,000

8,648

Primary issuance (in USD

bn)
Secondary market trade
(in USD bn)

10,215

3,911

5,821 5,410 6,686

5,000 1,527 1,668 2,238

2006 2007 2008 2009 2010 2011 2012
The primary bond issue market grew at 23% CAGR for the
period 2006-12
The secondary bond trade market grew at a CAGR of
around 22% for the same period

Indian Bond market at a glance

Bid-ask spread
12

10.6

10
8

6.4

6
4
2 0.6
0

2.1

2.7 2.7 3.1 3.2

Bid-ask spread (in

bps)

Indian bid-ask spread compared with other Asian

government bond markets is extremely high and
dysfunctional
The difference in bid-ask spread shows the lack of
liquidity in Indian bond market
Incase of a panic situation the investors need to book
huge losses if they need to exit the market

Share of government securities

Banking sector
Non Bank PDs
Insurance companies

4%

Mutual Funds

18%

Financial institutions

7%
1%
1%
0%
0% 21%

47%

Corporates
FII's
Provident funds
RBI

0%

Others

FIMMDA
FIMMDA stands for Fixed Income Money Market and Derivatives Association
of India
It is an Association of Commercial Banks, Financial Institutions and Primary
Dealers. FIMMDA is a voluntary market body for the bond, Money And
Derivatives Markets.

Members of FIMMDA
State Bank of India, its associate banks, Bank of India, Bank of Baroda;
Private sector Banks such as ICICI Bank, HDFC Bank, IDBI Bank; Foreign
Banks such as Bank of America, ABN Amro, Citibank, Financial institutions
such as ICICI, IDBI, UTI, EXIM Bank; and Primary Dealers.

Types of fixed income

securities
The different types of fixed income securities include
Government securities,
Corporate bonds,
Commercial paper,
Treasury bills,
Strips

Points of difference
Parameters

Equity

Debt

Ownership

Owners of the
company

Lenders of the
company

Risk

High

Low

Return

Variable

Fixed

Maturity

Till existence of
company

Pre-determined

Liquidation hierarchy

Last preference

First preference

Voting rights

Eligible

Not eligible

Components of fixed income

securities
Credit quality: It is an indicator of the ability of the issuer of the fixed
income security to pay back his obligation. These securities are usually
assessed by independent rating agencies such as Standard & Poor's,
Moody's ,CRISIL etc
Yield: It is implied interest offered by a security over its life
Maturity : It is the indicated life of the security

Institutional investors in Indian debt

market
The major institutional investors in Indian debt market are:

Banks
Insurance companies
Provident funds
Mutual funds
Trusts
Corporate treasuries
Foreign investors (FIIs)

Regulators of Indian bond market

Regulators
RBI of Indian bond market

Factors affecting bond

prices
The major factors affecting bond
prices are

Interest rate risk

Business cycle
Inflation in the economy
Flow of funds

The major factors affecting

Interest rate risk are:
Demand for money
Government borrowings
Supply of money
Inflation rate

Auction of securities
It is basically a price discovery mechanism, involves process of calling bids
with an objective of arriving at the market price
Types of auction includes
French Auction System
Dutch Auction Price
Private Placement
On-tap issue

Debentures and type of

debentures
A debt security issued by a company is called debenture
Types of debentures include
Based on security
Secured
Unsecured
Based on convertibility

Non Convertible Debentures (NCD)

Partly Convertible Debentures (PCD)
Fully convertible Debentures (FCD)
Optionally Convertible Debentures (OCD)
Deep discount bonds
Tax free bonds

How are government securities traded

The primary issue is facilitated by RBI through auction

conducted in the electronic platform called the NDSauction platform
Primary issue
Types of auctions
used
Yield based auction

Price based auction

Secondary trading

Trading in government securities take place through

Over the counter

market

Negotiated dealing Stock exchanges

system (NDS)

Terms related to
bonds/debentures
Coupon rate: It is the interest rate that every debenture/Bond carries on
its face value
Maturity date: The date on which the term ends and proceeds are paid out
is known as the
maturity date
Redemption of bonds/debentures: The repayment of borrowed money to
the investors at the time of maturity by the issuer is called redemption of
bonds/debentures
Current yield: It is the yield or return derived by the investor on purchase
of an instrument.
It is calculated by dividing coupon rate by purchase price
Yield to maturity: It is the return on an instrument when it is held till its
maturity and is known as the Yield-to-maturity (YTM). It is the total income
earned during the life of an instrument.
The total income consists of
Coupon income
Interest on interest at coupon rate
Capital gain/losses

Risk associated with fixed income

securities

The major types of risks associated with fixed income securities include
Interest rate risk
Reinvestment risk
Default risk
Maturity risk

Constituent Subsidiary General Ledger Account (CSGL) is a

service provided by Reserve Bank of India through which individuals
/institutions can hold Central/State Government Securities and
Treasury bills in book entry/dematerialized form.
Who can hold CSGL
Primary Dealers and Banks
Individuals

How to invest in different fixed income securities

Corporate bonds: Are issued when companies/ corporates needs to raise

funds
How to invest:
Fill out the application form available at the branches of the issuing
company with application fee and required documents
Documents required includes:
Pan card
Address proof
Identity proof
Bonds can be received in physical form or it will be credited to the demat
account of the holder

Government bonds: Are issued when governments needs to borrow funds

How to invest:
Fill out the application form available at the designated branches of
banks and post offices.
Documents required includes:
Pan card
Address proof
Identity proof
The holder will receive a bond certificate
A prescribed amount is to be paid as stamp duty for government bonds

Treasury bills: These are promissory notes issued at a discount for a fixed
period issued by central/state government through RBI. It is a short term
instrument
How to invest:
Can apply online through a financial intermediary having a CSGL account
Documents required includes:
Pan card
Address proof
Identity proof
Minimum amount is INR 1 lakh

Facets of buying bonds through secondary

markets

Regulators of Indian bond market

Why regulation
Ensuring financial stability and orderly market development
Framing requirements for regulation and reporting
Framing requirements for capital and collateral
Enhancing liquidity in debt and derivatives market
Regulating foreign investment limits in G-securities and
corporate bonds
Maintain financial benchmarks

Structure of Indian bond market

Market
segment

Issuers

Instruments

The
sovereign
issuer

Central
governme
nt
State
governme
nt

Treasury Bills, state government

securities,
index bonds, zero coupon bonds
etc

Govt.
agencies &
state
Bodies

Government guaranteed bonds/

debentures

PSUs

PSU bonds, debentures,

Commercial Papers (CPs)

Commercia
l banks /
DFIs

Commercial Deposits (CDs),

Bonds

Corporates

Bonds, debentures, commercial

paper ,
floating rate notes, floating rate
deposits ,
zero coupon bonds

Private
banks

Bonds, debentures, commercial

papers
and credit default swap (CDS)

The public
sector

The
Private
sector

Investors

RBI
DFIs
Banks
Pension
funds

Pension
Funds
FIIs
Corporate

Individuals
Pension
fund
Insurance
companies
Trusts
Mutual
funds

Regulatory measures undertaken to develop the

corporate bond market in India

Reporting platform developed by FIMMDA for all RBI regulated

entities to report on OTC trades in corporate bonds
Introduction of REPO in corporate bonds
Clearing houses permitted to create Pooling Fund Account
(PFA) with RBI for easier settlement of corporate bonds
Banks permitted to classify investments in companies
engaged in infrastructure activities as Non SLR bonds
Exposure norms for Primary Dealers (PDs) relaxed, allowing
them to play a broader role in bond market development
Relaxation of lock in period and residual maturity of
investments in infrastructure by FIIs
Permitting Qualified Foreign Institutions (QFIs) to invests in
mutual funds having 25% of assets in infrastructure bonds
Permitting banks to invest in unrated infrastructure bonds with
a ceiling of 10%
Setting up of Infrastructure Development Fund (IDF) for
generating long term debt funding

Measures for sustainable growth of corporate

bond market in India

Implementing measures to improve liquidity of bonds by

improving retail participation
Setting up a pertinent framework for market making in
corporate bonds
Creating tools for managing credit, market and liquidity risks
(e.g. CDS, Interest Rate Futures (IRF), Repo in corporate bonds,
etc.)
Enhancing transparency by setting up a centralized database
for tracking rating migration, issue size, etc.
Encourage foreign investor participation by increasing foreign
investor limits, providing tax incentives and easing
regulations.
Developing a safe and sound market infrastructure
Establishing a sound bankruptcy rule
Rationalization of stamp duty across states
Ensuring extensive participation of retail investors in the
market through stock exchanges and mutual funds.

Source & references

http://www.bseindia.com/markets/debt/FaqsdebtSegment.aspx?ex
pandable=7#
http://www.nseindia.com/products/content/debt/corp_bonds/FAQ_co
rporate_bond.pdf
http://www.fimmda.org/modules/content/?p=1015#a
http://www.asifma.org/uploadedfiles/resources/asifma%20india
%20bond%20market%20roadmap.pdf
http://www.sebi.gov.in/cms/sebi_data/DRG_Study/FIIGBM.pdf
http://www.smarterwithmoney.in/Article/How_and_where_can_I_buy
_bonds
http://articles.economictimes.indiatimes.com/2012-01-30/news/310
05887_1_gilt-funds-g-secs-sovereign-bonds
http://www.kotak.com/Kotak_BankSite/nri/investments/demat-servi
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http://www.sbidfhi.com/Products-Services.aspx?id=5
http://www.moneylife.in/article/buying-bonds-from-secondary-marke
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http://www.abhinavjournal.com/images/Commerce_&_