In recent years, Corporate Bonds have made a noticeable space in the financial world and evolved since their inception. Corporate Bonds not only benefit investors by providing higher returns than Government bonds and bank FDs but also contributes to the growth of the country’s economy. With the growing economy, there’s a considerable requirement for capital by private companies. Corporate Bonds allow for an accessible way to raise capital as a debt instrument.
In this blog, we will discuss the market trends shaping the bond market in India. Let’s dive into the pool of the financial market and understand more about it.
In FY 2022, the size of Corporate Bonds increased to INR 40 lakh Crores from INR 11 lakh Crores in FY2012. As per the reports by CRISIL, the size of outstanding Corporate Bonds is expected to touch INR 65-70 lakh Crores in FY 2025.
Still, in terms of the percentage of GDP, the size of the Corporate Bond market is comparatively small, also significantly smaller than other developing Asian Markets. This shows many measures need to be introduced to make the market more vibrant.
Growth in the Corporate Bond market is essential to provide a source of financing to companies and promote economic growth. The reason is that bank credit is insufficient to meet all the requirements for finance from organisations. Additionally, Commercial banks that provide such capital are also heavily dependent on retail deposits which are typically for the short term.
The bond market acts as a bridge and fulfills this gap between short-term deposits and long-term loans by providing long-term finance. As a result, the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have taken various steps to promote the Corporate Bond market in the country. Due to these measures, the Corporate Bond market has increased owing to:
The Corporate Bond market is affected by many factors, and understanding these factors is essential for you to make a better investment decision. The following are the points:
Credit Spreads And Risk Appetite
Credit spread is the difference in yield or interest between a Corporate Bond and a risk-free benchmark, which shows the market’s perception of the bond issuer’s credit risk. A wider credit spread shows a higher perceived risk, while a narrow one shows lower risk and higher credit quality. Credit spreads are crucial to determine the price of Corporate Bonds. Credit spreads are affected by various factors, including credit ratings, macroeconomic conditions, global market trends, and investors' sentiments.
Investor Demand And Supply Dynamics
Demand and supply influence the bond market in different ways. Interest rates, inflation, liquidity of the bonds, and investor preferences influence the demand for the bonds. On the other hand, government policies, regulatory framework, and the company's funding needs affect the bond supply. Understanding these demand and supply dynamics ensures you anticipate the potential bond yield changes and invest accordingly.
Regulatory And Policy Changes
Regulatory and policy changes affect the bond market considerably. SEBI and RBI implement reforms whenever required to improve transparency and market infrastructure. The policy changes may positively or negatively affect the investor's sentiments. But understanding the regulatory changes helps you navigate the changes in the financial market. As per the latest circular of SEBI published on 16th June 2023, investors can have better transparency because the circular tells that online bond platform providers (OBPPs) should cease offering products or services that are not permitted under the guidelines and this restriction ensures that investors are exposed only to listed debt securities.
Industry And Sector Trends
This includes economic cycles, government policies, global factors, and changes in technology that affect different sectors differently. For example, investors are more interested in investing in renewable energy, infrastructure, and technology after favorable policies were introduced. While industries that are facing economic or regulatory challenges, including may attract fewer investors.
Impact Of Technological Advancements
The ever-evolving technology impacts the bond market significantly. After the introduction of numerous digital platforms resulting in ease of access and reduced operational and transactional costs, people are more inclined towards Corporate Bonds. Moreover, technological advancement allows better risk management that helps in better credit analysis and decision-making.
Corporate Bonds are ideal for you if you are willing to take slightly higher risk, as they are riskier than the fixed deposit and government bonds but also provide higher returns. Moreover, they are less riskier than equities, making them perfect for a balanced mix of risk and return.
Corporate Bonds provide a good diversification tool as they have a low correlation with the financial markets and may help you reduce your portfolio volatility.
Corporate Bonds can be a good fit if you want to generate a consistent passive income. As Corporate Bonds offer better returns than traditional investment options, they allow you to improve your income stream. You can always look for the company's creditworthiness and the bond's rating before investing.
The Corporate Bond market is majorly influenced by various factors. Understating these factors ensure you select the best investment suitable for your investment goal and risk appetite.
Are you looking to invest in Corporate Bonds and capitalise on the factors shaping the bond market? Check out Grip Invest, an investment discovery platform for Corporate Bond investments where you can explore a variety of bonds, research, and have expert insights. Sign up with Grip Invest today!
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Disclaimer: This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest Technologies Private Limited ("Grip", formerly known as Grip Invest Advisors Private Limited) is not registered with SEBI in any capacity and does not advise, encourage, or discourage its users to invest or not invest in any securities. Grip is solely an execution-only platform and does not guarantee or assure any return on investments made by you in any opportunities sourced by Grip and accepts no liability for consequences of any actions taken based on the information provided. Your investment is solely based on your judgement. Investments in debt securities are subject to risks. Read all the offer-related documents carefully.